SEC 2022 rulemaking preview: Clarity to come on ESG, crypto?

As part of its rulemaking list released earlier this year, the agency proposed new regulations that would enhance disclosures for public companies in areas like climate change, board diversity, human capital management, and cybersecurity risk governance.

“These proposals will be informed by economic analysis and will be put out to public comment, so that we can have robust public discussion as to what information matters most to investors in these areas,” SEC Chair Gary Gensler said in remarks before the Senate Committee on Banking, Housing, and Urban Affairs in September.

Climate change disclosures: Gensler said in July he would like SEC staff “to develop a mandatory climate risk disclosure rule proposal for the Commission’s consideration by the end of the year.” Tick tock, tick tock. The end of the year approaches.

In the same remarks, Gensler said such mandatory climate change disclosures should be consistent and comparable and suggested they be disclosed in Form 10-K, “living alongside other information that investors use to make their investment decisions.”

He said the SEC might require companies to disclose Scope 1 and Scope 2 greenhouse gas emissions—Scope 1 being emissions from a company’s operation and Scope 2 from its use of electricity and similar resources. Disclosure of Scope 3 emissions—that is, emissions generated by third parties in a company’s supply chain—could also be required.

Many companies have promised to be “net zero” by a certain date but have provided little information about how they intend to meet that goal, or even how they measure their progress, Gensler said. “For example, do they mean net zero with respect to Scope 1, Scope 2, or Scope 3 emissions?” he asked.

The SEC could also require public companies use a particular standard as a benchmark, like the framework created by the Task Force on Climate-Related Financial Disclosures.

Board diversity: The SEC approved a rule in August encouraging (but not requiring) companies on Nasdaq’s public exchange to have at least two diverse directors—one who identifies as female and one who is an “underrepresented minority or LGBTQ+.”

The rule will require companies on the exchange to annually disclose their board-level diversity data. Companies not meeting the diversity objectives will be required to explain why in their proxy statement, information statement for their annual shareholder meeting, or on their website concurrently with their proxy statement or information statement.

Failure to meet the requirements—effective Aug. 8, 2022, or the date the company files its proxy or information statement for its annual shareholder meeting during 2022 (whichever is later)—could result in a company being delisted from Nasdaq.

Human capital management: A rule “could include a number of metrics, such as workforce turnover, skills and development training, compensation, benefits, workforce demographics including diversity, and health and safety,” Gensler tweeted in August.

Before the Senate Banking Committee in September, he said, “I think investing in a company—the human capital, the workforce—is a key asset. I’ve always found that if you’re going to buy a company or sell a company—when I was doing that at Goldman Sachs—that people really wanted to have a thorough review of that workforce and its ups and downs.”

Cybersecurity risk governance: Gensler told the SEC’s Asset Management Advisory Committee in September he asked staff to develop proposals “both on the issuers’ side and on the funds’ side. These could address issues such as cyber hygiene and incident reporting.”

“Right now, large parts of the field of crypto are sitting astride of—not operating within—regulatory frameworks that protect investors and consumers, guard against illicit activity, and ensure for financial stability. This asset class is rife with fraud, scams, and abuse in certain applications. We can do better.”

SEC Chair Gary Gensler

Gensler further explained to the Senate Banking Committee in September, “If you have a breach and you’re paying a ransom, what are you saying to the public, especially if you have private information?”

Cybersecurity, particularly ransomware, has received the full attention of the Biden administration.

The Department of Justice unveiled its Civil Cyber-Fraud Initiative in October, which made it clear the agency will be less tolerant of companies that do not report ransomware, breaches, and other cyberattacks promptly to the government.

The U.S. Treasury, through its Office of Foreign Assets Control (OFAC), has issued sanctions on ransomware criminals and the financial networks they use, while the Financial Crimes Enforcement Network (FinCEN) has updated guidance to banks and financial institutions regarding their responsibilities to report suspected ransomware payments transmitted over their networks.

Cryptocurrency in the crosshairs

Although Gensler taught a cryptocurrency course at the Massachusetts Institute of Technology, he has taken a hard stance on the industry since assuming the top role at the SEC. He has likened cryptocurrency to the “Wild West” and pledged to increase scrutiny, both to enhance investor protections and increase collaboration between other federal agencies that regulate commodities trading and banks.

“Right now, large parts of the field of crypto are sitting astride of—not operating within—regulatory frameworks that protect investors and consumers, guard against illicit activity, and ensure for financial stability,” Gensler said before the Senate Banking Committee in September. “This asset class is rife with fraud, scams, and abuse in certain applications. We can do better.”

Without exception, whenever the SEC has been formally asked (both before Gensler joined and since) for a determination on whether a cryptocurrency is a currency or a security, the answer has been the latter. One example is the denial of a request by Coinbase in September for its blessing on a new cryptocurrency lending program.

The SEC is not the only regulator interested in reining in cryptocurrency. Rostin Behnam, President Joe Biden’s nominee to serve as full-time chair of the Commodity Futures Trading Commission, told Congress in October the agency’s mandate over the industry should be expanded, while the Treasury Department in early November released recommendations on stablecoins—digital assets pegged to the value of the U.S. dollar that have received particular interest from the Biden administration.