On March 20, the House Financial Services Subcommittee on Capital Markets held a hearing entitled “Oversight of the Securities and Exchange Commission’s (SEC) Division of Corporation Finance.” Witnesses in the hearing were:
· Ms. Jennifer Schulp, Director of Financial Regulation Studies, Center for Monetary and Financial Alternatives, Cato Institute
· Mr. David Burton, Senior Fellow in Economic Policy, Thomas A. Roe Institute for Economic Policy Studies, The Heritage Foundation
· Mr. John Gulliver, Executive Director, Committee on Capital Markets Regulation
· Ms. Alexandra Thornton, Senior Director, Financial Regulation for Inclusive Economy, Center for American Progress
Below is a summary of the hearing prepared by Delta Strategy Group. It includes several high-level takeaways, followed by summaries of opening statements and witness testimonies and a summary of the Q&A portion of the hearing.
Key Takeaways
The following is a summary of the main topics explored in today’s hearing. Each is discussed in further detail in the Discussion section below.
- Today’s hearing centered around the SEC’s current rulemaking agenda, specifically the equity market structure rules and climate related risk disclosure rule, the Consolidated Audit Trail (CAT), artificial intelligence (AI), and briefly touched on digital assets.
- Many Republicans expressed concerns with the pace of the SEC’s rulemaking agenda, concerns that the Commission was becoming politicized, the brevity of comment periods, and a lack of cost-benefit analysis when considering rule implementation. Representative French Hill (R-AR) raised cybersecurity concerns regarding the CAT proposal.
- Democrats generally expressed support for the climate related risk disclosure. Representative Wiley Nickel (D-NC) questioned the sense of Staff Accounting Bulletin No. 121 (SAB 121) concerning the SEC’s regulation of the digital asset space.
SUMMARY
Opening Statements and Testimony
Committee Ranking Member Maxine Waters (D-CA)
- The SEC has played a critical role over the past 90 years in protecting investors from fraud and abuse and ensuring U.S. corporations provide adequate information about themselves. While the agency has done a solid job under the Biden administration, I believe there is still much more work to be done. For example, the need for transparency in the unregulated private securities markets rules to stop corporate executives from engaging in any work stock buybacks, and more comprehensive climate risk disclosures that apply to all issuers. The SEC also needs to be fully funded so that it remains an effective and relevant regulator.
Subcommittee Chair Ann Wagner (D-MO)
- Chair Gensler’s partisan rulemaking agenda at the SEC has threatened the health of capital markets and highlights the need for targeted institutional reform. Chair Gensler has issued roughly 60 new proposals and more than 30 final rules, many of which include sweeping new changes that were advanced without the requisite statutory authority, without a comprehensive cost-benefit analysis, or without satisfying the requirements of the Administrative Procedure Act (APA).
- The best example is the climate disclosure rule, which was finalized earlier this month. The SEC is not an environmental regulator, nor was it given clear authority to finalize climate related regulations that will only burden American businesses with serious costs.
Subcommittee Ranking Member Brad Sherman (D-CA)
- The SEC gives, on average, 67 days for the comment period, which is enough time. I applaud the SEC for its climate related disclosure rule because climate related concerns are material to report to investors.
Ms. Jennifer Schulp, Director of Financial Regulation Studies, Center for Monetary and Financial Alternatives, Cato Institute
- The SEC would benefit from reforms aimed at increasing the accountability and transparency of the agency to lawmakers and the public, ensuring adequate input and analysis to improve agency rulemaking, and holding the agency to high standards in the exercise of its functions. The ability of the SEC to bring actions in its administrative courts, rather than in Article III judicial courts, has expanded over time. The SEC has often strayed from the preferred method of rulemaking for creating agency policy, relying inappropriately on agency guidance and enforcement actions to create new regulations.
Mr. David Burton, Senior Fellow in Economic Policy, Thomas A. Roe Institute for Economic Policy Studies, The Heritage Foundation
- SEC resources have flowed into unnecessary management functions, while core functions have been neglected. The SEC is among the most management-heavy and bureaucratic agencies in government. Its information technology function is among the most expensive and least effective in government, and the agency provides inadequate oversight of so-called self-regulatory organizations (SROs).
- The SEC does a poor job of providing the information necessary for policymakers, whether Commissioners or members of Congress, to make informed judgments about the policy choices that they face. The Commission has failed to address critical regulatory issues, opting instead to pursue regulation by enforcement, and it pursues political and ideological objectives that are unrelated to its core mission.
Mr. John Gulliver, Executive Director, Committee on Capital Markets Regulation
- Most of the SEC’s rulemaking agenda has been voluntarily undertaken and has not been required by statutory mandate. The SEC’s economic analysis for each rule ignores any overlapping effects or conflicts with other proposed rules. SEC rulemaking economic analyses have failed to adhere to the legal standards and policies of the Commission, as they have insufficient comment periods.
- The SEC based its economic analysis on CAT data but did not publicize this data in connection with its proposal, even after multiple commenters identified it as crucial to assessing the economic analyses.
- The SEC asserted that the current equity market structure is uncompetitive and that the off-exchange segment of the U.S. equity market is too concentrated. The SEC’s economic analyses asserted that the equity market structure proposals will benefit the market by increasing competition and reducing concentration. However, the economic analyses failed to substantiate any such problem with the U.S. equity market structure.
Ms. Alexandra Thornton, Senior Director, Financial Regulation for Inclusive Economy, Center for American Progress
- The SEC is doing a job good responding to the criticisms of Congress. The agency has repeatedly, for complex proposals, re-opened formal comment periods to seek further clarification and more detailed information. The SEC has offered its own supplemental analyses to its proposals in the comment file, so that market participants may have further information for their analysis.
- The complaints against the CAT’s unprecedented collection of information are not true, given that regulators have for decades collected and had access to the information. The CAT simply ties together information that was historically available, but not in a useful way.
Discussion
Equity Market Structure
Wagner (R-MO): I am introducing a bill to require the SEC to make their economic analysis process much more robust. Can you explain why economic analysis is important in the rulemaking process? Gulliver: Requiring the SEC to identify actual problems within their purview would be much more effective. The SEC’s equity market structure proposals do not have this justification.
Consolidated Audit Trail
Hill (R-AR): From a cybersecurity perspective, what are your issues with the CAT proposal? Gulliver: There is a real risk that information could be breached, and information would be exposed.
Hill (R-AR): Is it necessary for the SEC to have the personally identifiable information (PII) to conduct the CAT? Schulp: No, PII is unnecessary.
Garbarino (R-NY): What are the dangers of CAT? Schulp: The personal information the CAT will collect should not be given to the government. It could be helpful to make the CAT a part of the SEC’s budget, so the cost is not passed down to end-users.
SEC Oversight
Wanger (R-MO): Why is it important that regulators testify in front of Congress frequently? Schulp: It is crucial to have a live dialogue between Congress and agencies like the SEC.
Sherman (D-CA): I would support legislation that mandated a comment period of 60 days for any complex rule the SEC may issue.
Sessions (R-TX): What examples can you provide of the SEC’s overreach and overregulation? Gulliver: It is concerning when the SEC reaches into private markets. Our private markets have been successful for several reasons, but there has been a reduction in the fees that the large private funds charge. The SEC is shifting in the direction of bringing more public regulations into these private markets, which will harm new entrants.
Waters (D-CA): Why is it important that our capital markets increase transparency? Thorton: The SEC should take away exemptions that allow access capital from the private markets without limit. The SEC could use more authority from Congress. The power dynamic in the private markets in unfair and unequal.
Waters (D-CA): Do you think that the SEC has impeded economic growth? Thorton: No, the SEC has done as much as it can to require the most information possible to ensure investors have the necessary disclosures to protect their investments.
Meuser (R-PA): How disruptive has the pace of the SEC’s rulemaking agenda been? Burton: The SEC has failed to address relevant issues within their rulemaking agenda and has instead made complex unnecessary regulations, like the crowd funding rule.
Gonzales (R-TX): What is an appropriate comment period for an SEC proposal? Burton: It would depend on the nature of the regulation. With a lengthy proposal, I think up to 120 days would be appropriate.
Steil (R-WI): Can you comment on the SEC’s rulemaking under Chair Gensler? Guliver: We have seen an unprecedented number of rulemakings under Chair Gensler with little sound justification.
Garbarino (R-NY): What are some of the issues with Chair Gensler’s rulemaking approach? Burton: He is aggressive in terms of his objectives.
Lawler (R-NY): I am concerned with the lack of stakeholder input the SEC seeks out. Can you describe your experience with the comment submission process? Schulp: The comment submission process is incredibly long, taking up to 60-80 hours as the SEC’s rule are hundreds of pages long.
Kim (R-CA): Can you explain how the SEC’s lack of cost-benefit analysis in the aggregate of their rulemaking is harmful? Guliver: There will be unnecessary compliance burdens and duplicative and conflicting rules, like the securities lending rule and the short selling rule.
Custody Rule
Nunn (R-IA): Can you give your thoughts on the custody rule? Gulliver: This rule is a great example of a rule that cannot be finalized as it is too extreme, sweeping in assets that cannot be custodied in the way the SEC imagines.
Digital Assets
Nickel (D-NC): Do you think SAB 121 is helpful? Guliver: No, SAB 121 is very harmful to those invested in crypto markets.
Climate Related Risk Disclosure
Sherman (D-CA): I support the climate disclosure rule as it will help investors make decisions.
Vargas (D-CA): Climate-related risk is a large issue facing the U.S. I applaud the SEC for considering feedback from investors on this rule.
Steil (R-WI): I am concerned that the SEC is becoming more political in its rulemaking agenda. Can you speak to materiality as a threshold? Burton: The SEC is trying to redefine materiality as something an investor would care about instead of something that produces a material outcome.
Casten (D-IL): Why is it important that the climate disclosure rule standardizes disclosures? Thorton: Information must be consistent and comparable for investors to be able to equally compare data across years.
Artificial Intelligence
Scott (D-GA): What do you think about the SEC’s handling and enforcement of AI? Thorton: Chair Gensler has been clear that there are unique risks associated with AI that pose risks to financial markets.
Nickel (D-NC): Do you think the predictive data analytics rule should be finalized? Guliver: No.
Nunn (R-IA): Can you explain how the SEC’s approach to AI may end up hurting our financial innovation capacity for decades to come? Schulp: The SEC’s fearmongering statements on AI and crypto, contribute to uncertainty in our markets and stifle innovation.
Other
Sherman (D-CA): The SEC’s proposals on swing pricing and the related liquidity proposals will do more harm than good.
Sessions (R-TX): Can you comment on the stock repurchase agreement? Guliver: The stock repurchase agreement is a great example of a particularly flawed cost-benefit analysis. It is important that if the SEC claims there is a market failure, they substantiate it with solid data.