On September 12, 2023, Gary Gensler gave his annual testimony to the United States Senate Committee on Banking, Housing and Urban Affairs and then on September 27th to the United States House of Representatives Committee on Financial Services (for a review of last year’s testimony see HERE). Both appearances included the same prepared remarks followed by robust Q&A from the lawmakers.
This year Chair Gensler’s prepared remarks focused on: (i) rule amendments and updates; (ii) improving efficiency in equity markets; (iii) disclosure matters and related enforcement including related to cryptocurrency; and (iv) general updates on the SEC and capital markets.
We shouldn’t expect the busy SEC rule making agenda to slow down any time soon. Chair Gensler prioritizes updating rules for technology, business and market changes. Although Gensler’s speech focuses on rule changes to make the markets more efficient and resilient and lower costs, the reality is that not all rule changes will accomplish that goal (for instance the extensive proposed climate change disclosures).
Gensler points to the first regulatory agenda published under his administration, i.e. the Spring 2021 Regulatory Agenda (see HERE) as setting the framework for the SEC’s priorities and goals which have continued until today. The SEC has issued proposals for most of the items laid out in that Spring 2021 Agenda and has finalized 22 rulemakings.
Interestingly, seemingly in response to ongoing scrutiny over short comment periods, Gensler devotes time in his speech to discuss the “adequate” comment periods and praises the SEC staff for reviewing and carefully considering each comment. Gensler also points out that nearly all adopted rules are modified from their proposals in response to public feedback.
Gensler highlighted two particular areas of the capital markets that are the focus of rulemaking changes. In particular, the equity markets, including Regulation Best Execution and order flow disclosures, and private funds, including disclosure obligations, sales practices, conflicts and compensation matters.
Under the subheading “Integrity and Disclosure” Chair Gensler drew attention to the SEC’s Rule 10b5-1 amendments (see HERE and HERE), executive compensation clawback rules (see HERE and HERE), pay versus performance rules (see HERE and HERE), amended share repurchase rules (see HERE), and numerous swap related rules.
Gensler also talks about the various proposed rules including related to SPACs (see Part 1- HERE; Part 2 – HERE; Part 3 – HERE; Part 4 – HERE; Part 5 – HERE; and Part 6 – HERE) and various new proposed rules targeting investment funds and advisors.
Chair Gensler continued his mantra from the past several years expressing concern over artificial intelligence and predictive data analytics, cryptocurrency, climate change disclosure and cyber security. Although in general artificial intelligence is a positive and can result in better investment decisions, Gensler’s concern is that it also creates an inherent conflict of interest between investors and broker-dealers or advisors. To that extent the SEC sent out a proposal to require firms to analyze conflicts of interest that may emerge when using predictive data analytics to interact with investors.
Cryptocurrency has been a target of today’s SEC for many years and that continues (see for example HERE). Consistently, Chair Gensler expresses that the vast majority of digital assets are securities and as such subject to the federal securities laws. Likewise for intermediaries such as trading platforms. Gensler states “[G]iven this industry’s wide-ranging noncompliance with the securities laws, it’s not surprising that we’ve seen many problems in these markets. We’ve seen this story before. It’s reminiscent of what we had in the 1920s before the federal securities laws were put in place.” I find this comment specifically interesting since market participants have been clamoring for an appropriate cryptocurrency regulatory framework and instead have only received guidance through a steady string of enforcement proceedings.
Gensler is not oblivious to the demand for regulations and not just enforcement. He points out a few rules directed to investment advisors’ custody of digital assets. Unfortunately, the crypto industry needs more if the U.S. has a chance of remaining competitive in this new technology.
Expressing his ongoing support for robust climate disclosure rules (for the proposed rules see Part 1 – HERE; Part 2 – HERE; Part 3 – HERE; Part 4 – HERE; Part 5 – HERE; Part 6 – HERE; Part 7 – HERE; and Part 8 – HERE) Gensler doubles down that these disclosures are a basic tenant of what a public company should be informing investors and investors are demanding the knowledge. The SEC has received more than 15,000 comments on the proposed rules.
Although Gensler talks about the newly adopted cybersecurity disclosure rules (see HERE), he does so mainly to point out that the final rules differed from the proposal based on comments and public feedback. This is a consistent theme in his prepared remarks.
Laura Anthony, Esq.
Anthony L.G., PLLC
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Securities attorney Laura Anthony and her experienced legal team provide ongoing corporate counsel to small and mid-size private companies, public companies as well as private companies going public on the Nasdaq, NYSE American or over-the-counter market, such as the OTCQB and OTCQX. For more than two decades Anthony L.G., PLLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker-dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions, securities token offerings and initial coin offerings, Regulation A/A+ offerings, as well as registration statements on Forms S-1, S-3, S-8 and merger registrations on Form S-4; compliance with the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers; applications to and compliance with the corporate governance requirements of securities exchanges including Nasdaq and NYSE American; general corporate; and general contract and business transactions. Ms. Anthony and her firm represent both target and acquiring companies in merger and acquisition transactions, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. The ALG legal team assists Pubcos in complying with the requirements of federal and state securities laws and SROs such as FINRA for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the small-cap and middle market’s top source for industry news, and the producer and host of LawCast.com, Corporate Finance in Focus. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.
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