Buckle up. Change is coming.
How Gary Gensler could impact the SEC
After an afternoon of committee hearings, the U.S. Senate Committee on Banking, Housing, and Urban Affairs voted to confirm Gary Gensler as chairman of the U.S. Securities and Exchange Commission (SEC).
The final step is a vote by the full Senate, which is expected in the next few weeks.
The real action in Gensler’s confirmation process was during the Senate Banking Committee hearings. As Senate confirmation hearings go, this one was pretty tame. Yet it was a Senate hearing, and there was no shortage of posturing while lawmakers probed Gensler for his views about the limits and opportunities of the SEC’s regulatory power. In his opening remarks, Gensler said, “The SEC does its job best when there are clear rules of the road and a cop on the beat to enforce them.”
Gensler is a prominent MIT professor, and a finance and policy expert who is known as a tough regulator. He earned that reputation as the Chairman of the U.S. Commodity Futures Trading Commission (2009–2014), a small, underfunded backwater that oversaw the $35 trillion commodity market. This didn’t stop Gensler from going up against Wall Street to rein in the highly lucrative, but lightly regulated, financial derivatives market. Credit default swaps were at the center of the 2008 global financial markets meltdown, which was cleverly captured in The Big Short by Michael Lewis. After Congress passed the Dodd-Frank Act, Gensler’s CFTC wrote 68 new rules and expanded its regulatory reach to include the $400 trillion swaps market.
Under Gensler you can anticipate an active rule-making agenda, especially in the areas of Environmental, Social, and Governance (ESG) disclosure and cryptocurrency. The SEC may reverse some Clayton-era regulations, and refocus enforcement action on corporate issuers.
We shouldn’t assume that Gensler will burn down the house in order to rebuild it. During the confirmation hearing, Gensler repeated his position many times: “I will be grounded in materiality,” he told the confirmation committee. “Investors make the choice about what’s material.”
With this in mind, consider how well-prepared you are for change in these areas:
The pressure is mounting for the SEC to mandate ESG disclosure.
The Biden Administration is likely to use everything it can to advance its climate agenda and social justice agenda, including leaning on the regulatory power of the SEC.
The Biden Administration isn’t alone in calling for ESG disclosures in SEC filings. The SEC is a decade behind Europe, where ESG disclosure is mandatory. The agency received more than 3,000 comment letters that objected to The Modernization of the S-K Act because it did not include climate risk and diversity disclosures, and SEC Commissioners Allison Herren Lee and Caroline Crenshaw voted against the new rules for the same reason.
Already, the SEC has sent a clear signal that some kind of environmental disclosure rule is coming. A week before Gensler’s Senate confirmation hearing, Acting SEC Chair Allison Herren Lee dropped a small grenade and announced that the agency is taking action to update its 2010 guidelines about how publicly traded companies should disclose climate change-related risks.
In response to investors' calls for more transparency about their environmental impact, many companies already disclose more than the SEC requires. If your company isn’t there yet, get ready. Some starting points include The SEC Institute, a source for hands-on accounting workshops; the Sustainability Accounting Standards Board (SASB), a leader in standardized disclosures by industry; and national sponsor Workiva has developed tools to streamline and integrate ESG reporting.
You can count on the SEC to unwind some principles-based rules.
Under Jay Clayton, the SEC moved toward principles-based disclosure. Like many things in life, some of the new rules make sense on paper, but some—like the human capital resource disclosure—have left SEC filers scratching their heads about how to implement them. During confirmation, Gensler signaled a preference for “...clear rules of the road.” It’s possible that the SEC will unwind various principles-based rules implemented during the last Administration. It’s likely that the SEC will approve rules calling for more detailed company disclosures.
Where the SEC goes, the PCAOB follows.
We should also expect the PCAOB’s agenda to reflect SEC priorities. At the very least, a new administration and new leadership at the SEC could reinvigorate the PCAOB and its audit enforcement mandate. An easy win for the PCAOB would be to reverse its late 2020 rule change that diluted auditor independence requirements.
A change in enforcement priorities could impact SOX.
Under Jay Clayton, the SEC recovered a record-breaking amount in penalties and financial remedies, mostly by enforcing regulations on Wall Street and protecting the retail investor. Meanwhile, the House passed The 8-K Trading Gap bill and it’s currently under consideration in the Senate. It’s possible that a Gensler-led SEC will refocus enforcement on insider trading, which has fallen dramatically in the last 10 years, as well as refocus on corporate issuer reporting, audit, and accounting.
Your next steps? This might be the time to brush up on Rule 10b-5 and to partner with the GC and take a closer look at your company’s 8-K processes.
Gensler will deal with important issues in trading technology, digital assets, and cryptocurrency.
Gensler’s confirmation hearing came on the heels of Congressional hearings into the market volatility created by retail investors, the Robinhood app, and the company Gamestop.
Gary Gensler is the guy you want to study the intersection of rapidly innovating markets, the technologies that enable them, and to update market oversight accordingly. He is an important influencer in fintech, and he is respected by the major players in the cryptocurrency industry. As a professor in the MIT Sloan School of Management, Gensler teaches about blockchain and digital currencies, conducts research, and writes about the policy implications of fintech innovation. He sits on the New York Federal Reserve’s Fintech Advisory Council and testifies before Congress about digital currency policymaking and regulation.
During the confirmation hearing, Gensler agreed with Senators that market oversight needs to be updated, and, “...market oversight should be technology-neutral, and stay true to the core of the SEC’s mission.”
He also has signaled his willingness to address the regulatory issues brewing in cryptocurrency. “If we think the crypto world is going to be part of the future, it needs to come inside of public policy envelope,” Gensler said in a 2018 Bloomberg interview. “Regulatory clarity and greater oversight could lead to greater mainstream adoption.”