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The House Financial Services Committee will hold a hearing on oversight of the Securities and Exchange Commission this morning. Oversight hearings are normally a snoozefest but this one has the potential for fireworks.
That’s because SEC Chair Gary Gensler has aroused the ire of many in corporate America over his 50+ list of new regulatory proposals the SEC is scheduled to vote on this year.
The proposals run the gamut, from addressing climate change and board diversity to updating rules on best execution and payment for order flow (PFOF), securities lending, short sale disclosures, shortening the settlement cycle for securities, cybersecurity, and more disclosure on private funds and the advisors around them.
Too many rules, too little time to respond
Wall Street’s principal complaint against Gensler: Too much, too fast.
“The barrage of rulemaking at the SEC is unprecedented and merits the close scrutiny of Congress,” Tom Quaadman, executive vice president at the U.S. Chamber of Commerce, said in an open letter to the House Financial Services Committee. “Chair Gensler has identified a range of 50-55 regulatory priorities since the start of his tenure, and has already proposed twice as many rules as his predecessor in just half the time.”
The chair of that committee seems to share those concerns.
“There’s a massive amount of change that this chair is trying to drive and it has a lot of expense in the markets and he’s given a limited amount of time for actually good comment,” House Financial Services Committee Chairman Patrick McHenry (R.-NC) said on CNBC Tuesday morning. “So we’re going to have shoddy rules that are very expensive on a market at a time where the rest of the world wants to take our capital markets. I don’t think it’s a smart agenda.”
This is more than just a complaint: If the SEC is not giving due merit to the concerns of those affected by the proposed rules it could get sued, which is exactly what U.S. Chamber of Commerce CEO Suzanne Clark said is the likely result.
The chamber can work with Gensler and his team, Clark said on CNBC Monday. “We submit comments and have pleadings, we do everything that we can to get the appropriate amount of regulation and smart regulation accomplished,” she said. “If that doesn’t work, then we take them to court.”
Challenging SEC authority on climate change
Few proposals have aroused more debate than Gensler’s plan to have public companies disclose risks they may face around climate change. The SEC has received 15,000 comments so far.
In his prepared testimony, Gensler concedes, “The SEC has no role as to climate risk itself. But we do have an important role with regard to ensuring for public companies’ full, fair, and truthful disclosure about material risks.”
Gensler says that hundreds of companies already make climate risk disclosures and he is simply trying to build order out of chaos.
But the proposed rule is facing considerable opposition from the business community, which argues that there is too much disclosure required, and from Republicans who claim that it’s a back-door means to push a climate change agenda.
Opponents of climate change disclosure have a big weapon
Opponents of increased regulation cite a potent court case that has emboldened them.
Last year, in West Virginia v. EPA, the Supreme Court ruled that there are limits on a regulator’s powers. In that case, the Court relied on the “major questions doctrine,” which holds that Congress has not delegated issues of major significance to regulatory agencies. Any agency must be able to point to a clear statement from Congress authorizing its action.
That case related to the Clean Air Act and the ability of the EPA to regulate carbon dioxide emissions. “The majority found that the EPA had exceeded its congressionally-delegated responsibility by pushing utilities to make system-wide moves away from coal-generated power and towards cleaner forms of electricity generation,” according to a summary of the case at JDSupra.
Since Congress has not passed major climate legislation for years, opponents of the SEC’s climate rule will likely sue the SEC and cite West Virginia v. EPA , again arguing that Congress has not granted specific authority for the SEC to act on climate change.
That is exactly the line of attack the Chamber of Commerce suggested: “How has the Securities and Exchange Commission heeded the major questions doctrine — as advanced in West Virginia v. EPA — in its interpretation of its rulemaking authority?,” Quaadman said in his letter.
Gensler on crypto
Crypto enthusiasts have been frustrated by Gensler’s refusal to approve a spot bitcoin ETF and by his stepped-up enforcement efforts against crypto exchanges and others in the community, which critics say is an attempt by the SEC to gain control over the industry.
“The vast majority of crypto tokens are securities,” Gensler declared in his written testimony to the House Financial Services Committee. “Given that most crypto tokens are securities, it follows that many crypto intermediaries are transacting in securities and have to register with the SEC.”
But without clear regulatory authority from Congress, there has been considerable pushback.
“SEC Chair Gensler is long overdue to testify before the House Financial Services Committee,” Rep. French Hill (R.-Ark), Vice Chairman of the House Financial Services Committee, said in a statement released to CNBC. “I have deep reservations about the SEC’s approach to digital assets, including its ongoing turf battle with the CFTC and its efforts to front-run bipartisan efforts in Congress to pass payment stablecoin legislation.”
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