U.S. Securities and Exchange Commission Chairman Gary Gensler testifies during a Senate Banking Committee hearing on Capitol Hill in Washington, DC, September 12, 2023.
Drew Angerer | Getty Images
The annual two-day “SEC Speaks” event began Tuesday and provided guidance on the Securities and Exchange Commission’s priorities for the coming year.
Sponsored by the Practicing Law Institute, it is a forum in which the SEC provides guidance to the legal community on rules, regulations, enforcement actions and litigation. The event allows the SEC to convey its key messages, and this year “disclosure” is a key theme.
“[W]“We have a duty to update the rules of the road, always with an eye toward promoting trust as well as efficiency, competition and liquidity in the markets,” SEC Chairman Gary Gensler said in his introduction to the conference. Except Gensler, all SEC department heads and senior executives will speak.
Based on Gensler’s introductory remarks, there will be discussions about the upcoming move to shorten the securities settlement cycle from two days to one day (T+1, which takes place on May 28) and expanding the definition of an exchange to include newer transaction platforms (such as request- for-Quote or RFQ, electronic trading platforms), considering changing the current one-penny increment for listing stock trades to sub-penny levels, creating a best-execution standard for broker-dealers and creating more competition for individuals Investor orders (so-called payment for order flow).
The SEC’s mission
You often hear SEC officials say that the role of the SEC is “to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.”
That sounds like a pretty broad mandate, and it is. On purpose. It emerged from the catastrophe of the stock market crash of 1929, which marked the beginning of the greatest economic catastrophe of the last 100 years: the Great Depression.
Before 1933, and especially in the 1920s, all kinds of securities were sold to the public with wild claims, many of them fraudulent. After the 1929 crash, Congress set out to find a cause, and fraudulent claims and lack of disclosure were at the top of the list.
Congress then passed the Securities Act of 1933 and the following year the Securities Exchange Act of 1934, which created the SEC to enforce any new laws. Additionally, anyone engaged in the securities business (mainly brokerage firms and stock exchanges) was required to register with the SEC.
The 1933 law did not make the sale of a bad investment illegal. All that was required was disclosure: all relevant facts about an investment should be disclosed and investors could form their own opinions.
The 1933 Act was the first major federal law regulating the offer and sale of securities in the United States. This was followed by the Investment Company Act of 1940, which regulated mutual funds (and eventually ETFs), and the Investment Advisers Act of 1940, which required investment advisers to register with the SEC.
On the agenda
Tuesday’s conference is an opportunity for Gensler and his staff to tell everyone in more detail what they do. The authority has six divisions, but these can be boiled down to disclosure, risk monitoring and enforcement.
Risk monitoring. In order to fulfill their mandate to protect investors, it is important to understand what risks investors face. There is a department for economic and risk analysis for this purpose.
Disclosure. At the heart of the whole game is disclosure. That’s the original requirement of the 1933 law. The SEC has a corporate finance division to ensure that Corporate America makes disclosures on issues that could materially impact companies. This begins with an IPO and continues when the company goes public.
There is also an audit division that runs the SEC’s national audit program. It’s exactly what it sounds like. The SEC identifies areas of particular concern (cybersecurity, crypto, money laundering, climate change, etc.) and then monitors Corporate America (investment advisors, investment companies, broker-dealers, etc.) to ensure they are complying with all required disclosures. Current topics include climate change, crypto and cybersecurity.
The problem is that the definition of what should be disclosed has evolved over the decades. For example, a bitter legal battle is brewing over the recent passage of regulations requiring companies to disclose climate risks. Many claim this was not part of the original SEC mandate. The SEC disagrees, arguing that this is part of the mandate to “protect investors.”
Enforcement. The SEC can use the information it collects to make policy recommendations, and if it believes a company is out of compliance, it can also refer it to the dreaded enforcement division.
These are the cops. They conduct investigations into violations of securities laws and prosecute civil suits in federal courts. This division will provide updates on litigation involving the SEC, which is increasing in number.
Mutual funds, ETFs and investment advisors. We will also hear from the department that oversees mutual funds and investment advisers. Most people invest in the markets through an investment advisor and typically purchase mutual funds or ETFs. This is all governed by the Investment Company Act of 1940 and the Investment Advisers Act of 1940. There is an investment management division that oversees all investment companies (including mutual funds, money market funds, closed-end funds and ETFs) and investment advisors. This Division will share insights on some of the new disclosure requirements enacted in recent years, particularly the rules for private fund advisers adopted in August 2023.
Trade. Finally, the Trading and Markets Department oversees everyone involved in trading: broker-dealers, exchanges, clearinghouses, etc. We can expect updates to recordkeeping requirements that shorten the trading cycle (one-day settlement applies in the US). from a three-day settlement on May 28th, which is a big deal) and short selling disclosure.
Did we mention SPACs?
Donald Trump is unlikely to be featured at the conference, but the SEC significantly tightened disclosure rules for special purpose acquisition companies (SPACs) in January. Trump’s company Truth Social went through a merger with a SPAC called Digital World Acquisition Corp. on March 22. to the stock market. It now trades as Trump Media & Technology (DJT)and it made revelations on Monday that caused the stock to fall about 22%.
Before recent rule changes, executives marketing a company to be acquired by a SPAC often made wild claims about the future profitability of those companies – claims that would never have been possible in a traditional IPO. The new SPAC rules that the SEC adopted made the target company legally liable for any statements about future results by assuming responsibility for disclosures.
In addition, companies enjoy a safe harbor when making forward-looking statements, which protects them from certain legal liabilities. However, IPOs do not enjoy this safe harbor protection, which is why forward-looking statements in an IPO filing are typically worded very cautiously.
The rules made it clear that SPACs also do not have a safe harbor for forward-looking statements, meaning the companies could be more easily sued.
As I said, Trump probably won’t come up at the conference, but the message: “Disclosure!” will likely be the dominant refrain.
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2024-04-02 14:03:15
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