On Friday, June 11, the Securities and Exchange Commission (SEC) rolled out an ambitious rulemaking agenda, reflecting Chair Gary Gensler’s promises to prioritize environmental, social, and governance (ESG) issues; respond to recent market events and trends; revisit Trump-era rulemakings; and fulfill the agency’s statutory mandates. These rules stand to have wide-ranging effects on public companies, impacting everything from how public companies account for their climate risks to the use of gamification and payment-for-order flow by online brokers and the ability of companies to go public through Special Purpose Acquisition Companies (SPACs).
The Unified Agenda of Federal Regulatory and Deregulatory Actions is published semiannually and encompasses the regulatory plans of approximately 60 federal departments, agencies and commissions.
Overview and Trends
Notably absent from the SEC’s agenda is any action regarding the $2 trillion market for cryptocurrencies, leaving investors and the financial industry without hope of regulatory certainty in the near term. Following the SEC’s December 2020 request for comment on custody of digital assets, the agenda does include a proposal to amend the custody rules for investment advisers. However, it appears that Chair Gensler, consistent with his testimony before the House Financial Services Committee, will leave the regulation of cryptocurrency exchanges to Congress.
Of the 49 rules listed for action, the focus of new proposals coming out of the SEC is on ESG issues for public companies. These proposals are a direct response to increasing investor demand and political pressure from both the Biden administration through its Executive Order on Climate-Related Financial Risk and Democrats in the House, who are set to vote on June 15 on the Corporate Governance Improvement and Investor Protection Act (H.R. 1187), a package of ESG bills. Included in the agenda are proposals to require public companies to disclose their board diversity, human capital management and risks related to climate change and cybersecurity.
On the governance side, the SEC intends to propose rules to establish more guardrails on how corporate insiders are able to trade company stock using 10b5-1 trading plans and finalize rules to allow shareholders voting by proxy to select among all nominees in a contested election of directors, known as universal proxy access.
Responding to Market Events
The SEC is set to take on a series of rulemakings directly related to recent market events, including market volatility surrounding GameStop and other meme stocks in January 2021; the collapse of the family office, Archegos, in March; and the distress of the institutional prime money market fund market (MMF) at the beginning of the COVID-19 pandemic.
Specifically, the agency will:
- seek public comment on the use of gamification and behavioral prompts by online brokerage firms like Robinhood to encourage trading by retail investors; and
- propose rules to:
- modernize best execution requirements for brokers,
- address market concentration among wholesale brokers, examine the use of payment for retail order flow,
- shorten the settlement cycle for securities from T+2 to T+1, and
- mandate additional disclosures of beneficial ownership and other interests in security-based swaps—a direct response to the Archegos collapse.
Short Selling. To promote greater transparency into institutional investor ownership, the SEC will propose rules pursuant to Dodd-Frank Section 929X to require short sale disclosures. Based on comments from Chair Gensler, such a proposal will likely seek to address reforms to Form 13F for shorts and derivatives and make such disclosures timelier so that companies, financial market participants and regulators have better insight into institutional investor activity.
MMF Reform. With the encouragement of the Financial Stability Oversight Council via a statement issued on June 11, the SEC will also tackle potential amendments to prime institutional MMFs to ensure greater liquidity during periods of market stress.
SPACs. The agency intends to tamp down on the popularity of SPACs by proposing rules to assess additional disclosures of conflicts of interest between the sponsors, directors, officers and affiliates of the SPAC who are economically vested in closing the deal and the interests of the ultimate shareholders.
Revisiting Trump-Era Rules
With respect to rulemakings completed under the Trump administration, the SEC plans to revisit some of the more controversial rules that impact investor protections. Specifically, the SEC plans to revisit rules regarding:
- shareholder proposals,
- proxy advice,
- private offerings,
- disclosures of payments by resource extraction issuers, and
- the SEC’s whistleblower program.
Such changes to the rules governing the shareholder proposal process and proxy voting advice are a welcome sight to Democrats in Congress who have considered repealing the rules to promote shareholders’ ability to consult with management on key issues like climate change with access to independent advice.
With respect to private offering reforms, the agency will:
- Review the financial thresholds for sophisticated investors, known as accredited investors,
- require additional disclosures under Regulation D, and
- revisit instances where private offerings should be integrated as a single offering.
On June 14, Republican SEC Commissioners Peirce and Roisman lamented the agency’s inclusion of these rules in the agenda, noting that the rules are less than a year old and lack any justification to revisit.
Congressionally Mandated Rulemakings
Finally, the SEC agenda includes a host of rulemakings mandated by Congress, including those dating back to the 2010 Dodd–Frank Wall Street Reform and Consumer Protection Act. These include rules governing:
- pay versus performance disclosures rules (required by Section 953(a)),
- disclosure and clawback of incentive-based compensation (required by Section 954),
- incentive-based compensation arrangements (required by Section 956),
- conflicts of interests between those that securitize and sell asset-backed securities (required by Section 621), and
- securities-based swaps and securities lending (required by various provisions).
The agency will also implement trading prohibitions for Chinese companies as required by the Holding Foreign Companies Accountable Act, which was enacted in December 2020.
The Unified Agenda provides a timeline of the SEC’s expected activities over the next year. Each regulatory item is targeted for release in a specific month, with dates ranging from mid-2021 to mid-2022. However, the agenda is nonbinding, and expected release dates often slip by or are postponed as Congress tasks agencies with new rulemakings by Congress and priorities shift.
More information on each of the proposals identified above can be found on the SEC’s full agenda.