SEC spring rulemaking agenda signals potentially hectic fall for compliance

The agency released its regulatory agenda for spring 2022 Wednesday, more than 50 proposed regulations that address a multitude of issues, from short selling to special purpose acquisition companies (SPACs) to finalizing a number of regulations included in the Dodd-Frank Act that have yet to be codified 12 years since the law was enacted. But the agenda is also notable because many of the SEC’s most controversial rule changes are in the final stage, meaning they could be approved by the agency before the end of the year.

Final action by the SEC on its climate-related disclosure rule is due in October, according to the agenda. The rule is a sweeping potential mandate that 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.

Also due for final action in October are amendments to rules for whistleblowers that would unwind some Trump-era changes; Dodd-Frank rules on erroneously awarded compensation, pay vs. performance, and enhanced reporting on proxy and executive compensation votes; shortening the settlement cycle for all securities trades from two days to one day; and amendments to electronic recordkeeping requirements for broker-dealers, security-based swap dealers, and major security-based swap participants.

“It is the most ambitious agenda that I’ve ever seen—and the most aggressive,” said Ken Joseph, managing director at Kroll who previously served at the SEC for 21 years, including as a senior officer in the Division of Examinations.

The agenda, he said, could be criticized as too ambitious and too far out of the commission’s normal swim lane of investor protection and into politically charged areas.

Mark White, principal securities manager for Wolters Kluwer Compliance Solutions, said the scope and timing of the proposed changes is a major concern.

“I wonder how the swiftness (of the approvals) is going to affect companies,” he said. “It could be a regulatory nightmare.”

“The myriad of different rules that could be adopted in the next year will cause corporations and their compliance departments to have to contend with a lot of new requirements. The increasing cost and disruptions caused by these rules is a factor that cannot be ignored.”

Ken Joseph, Managing Director, Kroll

Erin Martin, partner at Morgan Lewis who spent the last 13 years with the SEC in its Division of Corporation Finance, said the agenda clearly shows the agency has made its climate-related disclosure rule a priority. But the October date listed for a vote is probably not realistic, especially considering the comment period just closed last week.

“It’s really hard to know how much weight to put on the timing of implementation and adoption,” she said.

Lance Dial, also a Morgan Lewis partner, added, “I wouldn’t use those (October) dates as firm indicators. It indicates they are on the front burner; whether it’s in the next six months or a year, it’s hard to say.”

Debate on the climate-related disclosure rule continues. The rule has some merit in forcing firms to disclose climate-related risks that could affect their bottom line, Joseph said. The rule’s goal of increasing transparency on these issues is laudable, he said. But there are aspects of the rule, like measuring and reporting greenhouse gas emissions from third parties, that will be difficult to comply with, he said.

And the cost to comply with the rule, along with numerous others, will prove to be a significant burden for companies large and small, he said.

“The myriad of different rules that could be adopted in the next year will cause corporations and their compliance departments to have to contend with a lot of new requirements,” Joseph said. “The increasing cost and disruptions caused by these rules is a factor that cannot be ignored.”

Among all the rules being pushed forward is one glaring omission, said White: None attempt to regulate blockchain technology, digital assets including cryptocurrency, and nonfungible tokens.

“These newer financial vehicles are really making waves in the financial industry, like nothing ever has, probably,” he said.

In addition, blockchain technology is being used by bad actors in a variety of ways, from evading sanctions to scamming investors to being the preferred method of payment for ransomware and other cybercrime.

“There’s nothing on the agenda to combat that at this point, which is really interesting to me,” he said.

Pushed off to April 2023 for final consideration include rule changes meant to curb insider trading, improve firms’ management and reporting of cybersecurity breaches, short sale disclosure reforms, enhanced reporting rules for hedge and private equity funds, and more.

Joseph said the new requirements proposed for hedge and private equity funds, in particular, could “radically alter” the way those firms conduct business.

Still in the proposed rule stage, with a final consideration date not yet scheduled, are rules aimed at enhancing disclosures on human capital management, increasing diversity on corporate boards, enhancing disclosure rules for investment firms on ESG fund naming and strategies, and SPACs.

“When I think about the SEC’s agenda, I’m driven by two public policy goals: continuing to drive efficiency in our capital markets and modernizing our rules for today’s economy and technologies,” said SEC Chair Gary Gensler in a press release. “Doing so will help us to achieve our three-part mission: protecting investors; maintaining fair, orderly, and efficient markets; and facilitating capital formation.”

Republican Commissioner Hester Peirce said the agency is devoting its finite resources to furthering “rulemaking proposals disconnected from our core mission.”

“The agenda continues to shun issues at the core of our mission in favor of shiny objects outside our jurisdiction,” she said in a statement. “We used to focus on companies’ disclosure of economically material information; we now focus on disclosure of hot-button matters outside our remit.”

Among proposed rules Peirce argued are outside the agency’s remit included enhanced disclosure requirements on climate-related risks and human capital management and a mandate to increase board diversity. She also criticized the SEC under Gensler for pushing through sweeping regulatory changes without allowing for “meaningful input” from affected stakeholders, which she said include investors, public companies, and the public.