Loaded SEC agenda to carry into 2023

Proposals regarding climate-related disclosures; cybersecurity breach notifications; and environmental, social, and governance (ESG) claims by investment advisers remain unfinalized. SEC Chair Gary Gensler, who has been outspoken in his belief most cryptocurrencies are likely securities, will bring his expertise on the subject to the table as Congress and other regulators seek to determine how to oversee the turbulent industry.

Meanwhile, a variety of factors—including legal challenges to controversial rules and a Republican takeover of the House—could place significant roadblocks in the way of the SEC’s agenda.

Industry and lobbying groups have indicated they intend to file legal challenges against the agency’s most controversial proposal: the climate-related disclosure rule. While the policy is slated to apply to fiscal year 2023 financial statements by large accelerated filers, any lawsuit could delay its implementation.

On the enforcement side, the SEC’s new marketing rule for investment advisers took effect Nov. 4 and allows certain types of marketing, advertising, endorsements, and testimonials that were previously either prohibited or so difficult to comply with that they were effectively banned. Further, the agency will continue its sweep of off-channel business communications by employees working for financial services firms that has already resulted in more than $2 billion in total fines.

The SEC will likely slow its pace of rulemaking in 2023 because of the changing political environment, said Ken Joseph, managing director at Kroll who previously served for 21 years at the agency, including as a supervisor within its Division of Enforcement. House Republicans have pledged to launch investigations on regulation topics including climate risks and ESG investment strategies. One incoming Republican congressman told Politico that Gensler “might as well bring a cot” with him to the House Financial Services Committee, where he will likely be a regular visitor.

“It may have a chilling effect on the pace of rulemaking,” said Joseph of the additional scrutiny. “There has to be a re-evaluation based on the political realities. You have to look and see what still makes sense given the political climate and industry pushback.”

Joseph predicted the regulation of cryptocurrencies to be a hot topic in the year ahead.

“I think regulatory clarity will help cryptocurrencies,” he said. “As industries mature, some prudent regulation levels the playing field, provides investor protections, and helps the whole industry thrive. The question is what regulation will look like and who will regulate it.”

SEC rulemaking goals

At the top of the SEC’s pending policy list is the climate-related disclosure rule, which would force all public companies to quantify, measure, and disclose their effect on the environment. It would order public companies to include disclosures about how climate-related risks affect their strategy, business model, and outlook; how the company’s board and management oversee climate-related issues; and any plans for transition to a lower carbon footprint.

“I think regulatory clarity will help cryptocurrencies. As industries mature, some prudent regulation levels the playing field, provides investor protections, and helps the whole industry thrive. The question is what regulation will look like and who will regulate it.”

Ken Joseph, Managing Director, Kroll

The rule was expected to be implemented earlier this year, but the agency received thousands of comments from industry, trade groups, investors, and individuals before having to reopen the feedback period because of a technical glitch. Commenters expressed concern about the rule’s mandates on how to measure and report the greenhouse gas emissions of their supply chain and vendors (Scope 3), its broad definition of materiality, as well as the cost of compliance.

Once the rule is passed, it might be challenged in court by the U.S. Chamber of Commerce and other industry groups. Longtime followers of the SEC noted parallels between the legal arguments posed in opposition to the climate-related disclosure rule and those raised against the agency’s conflict minerals rule adopted in 2012. The legal challenge to the conflict minerals rule took five years to resolve.

The SEC in March proposed a cybersecurity disclosure rule that would require companies to disclose data breaches four business days after they occur. The rule would mandate companies disclose whether any data was stolen, steps taken to remediate the incident, and how operations were affected. Periodically, the company would have to provide updates to investors about the material effects the incident had or continues to have, as well as how it is being addressed.

Another rule up for consideration by the SEC in 2023 would require registered investment advisers, investment companies, and business development companies to submit enhanced disclosures about funds that claim ESG strategies drive their investment choices. Funds that claim to consider ESG factors would have to disclose to investors the factors they consider, along with the strategies they use. This could include whether the fund tracks an index, includes or excludes certain assets from its investment mix, uses proxy voting or engagement to achieve certain objectives, or aims to have a specific impact.

One area of scrutiny by Republicans will be any rule that attempts to incorporate ESG principles into the financial decision-making of public companies and investors, particularly the administrators of public employee pension funds.