Gary Gensler, SEC Chairman, sets forth a bold regulatory plan. Its implications for investors.

Gary Gensler and his staff are currently occupied and will become even more so soon.

The Securities and Exchange Commission is currently considering about 50 proposed rule changes, with a few in the final regulatory stage and set to be adopted soon.

Amy Lynch, president of Frontline Compliance and a former SEC compliance official, stated that the current regulatory agenda of the SEC is one of the largest seen in recent years.

Lynch stated that since there are numerous items on the list, they will need to select and prioritize one.

What’s the priority?

The list of proposed rules is extensive, but can be categorized into several "buckets," including ESG, buybacks, insider trading, executive compensation, trading activities, and investor protection.

The proposed rules on ESG, a popular investment theme, are considered hot button issues.

Proposed ESG-type rules include:

Climate change:  enhanced disclosures on climate-related risks and opportunities.

Board diversity:  disclosure about the diversity of board members and nominees.

Human capital management:  additional disclosure on how companies manage their workforce.

Wall Street is closely monitoring the proposed rules. Numerous mutual funds and ETFs claim to provide ESG-focused investments.

An attorney at Williams & Jensen, David Franasiak, who specializes in tracking legal developments in Washington, stated that the ESG community would be thrilled to obtain more details on how corporations are addressing new investment concerns in this area.

Franasiak informed me that they require usable metrics to update their models and introduce new products," and "ESG funds have gained immense popularity.

The popularity of ESG funds at the SEC is unclear. Gensler has stated that he would like companies and investment advisors to disclose the criteria they use to define ESG-type investments.

Buybacks, insider trading and executive compensation

Gensler and his team have stated their intention to gather more information about how corporations allocate their profits, how executive compensation is determined, and how executives purchase and sell their shares. The proposed regulations focus on these areas.

Buybacks:  more disclosure on share repurchases.

Gensler is concerned that corporate executives are not disclosing their stock sales and trades as required by rules, particularly Rule 10b5-1, which provides a defense to insider trading for executives with access to material nonpublic information.

Gensler is proposing guidelines that were initially suggested after the Dodd-Frank Act in 2010, which would prohibit incentive-based payment arrangements and require disclosure of any such arrangements. These rules were never enacted.

Trading activities and investor protection

The SEC seeks to gather more information about trading activity, specifically regarding short selling and stock lending or borrowing.

The SEC has not implemented the monthly disclosure of short sales as mandated by the Dodd-Frank Act.

The disclosure of lending transactions and their availability to the public is a mandate from Dodd Frank that was never implemented for lenders of securities.

The SEC is seeking greater transparency on special purpose acquisition companies (SPACs), particularly regarding fees and potential conflicts of interest between sponsors and investors.

Market structure and payment for order flow (PFOF)

The Gamestop/Reddit saga has piqued Gensler's attention, and the SEC is considering new rules on market structure, including order routing, conflicts of interest, best execution, market concentration, and the disclosure of best-execution statistics.

Gensler has raised concerns regarding the gamification of the U.S. trading system, which involves incorporating game-like features such as points, rewards, leaderboards, bonuses, and competitions to boost engagement.

Gensler has stated that payment for order flow (PFOF) may lead to a conflict of interest for brokers, as they can charge zero commissions by sending their orders to market makers in exchange for payments.

Industry participants have been urging Gensler to be careful.

Ken Bentsen, president and CEO of SIFMA, advised me to be very deliberate with my approach.

We have long advocated for a review of market structure, but it is crucial to avoid attempting to repair what may not require fixing. Despite this, the retail investor is currently receiving a superior deal compared to previous times.

Focus on Crypto

Gensler and his staff will be very active in deciding what falls under their jurisdiction regarding cryptocurrency, as the SEC chairman has refused to approve a pure-play bitcoin ETF due to concerns about fraud and manipulation, and believes Congress should clarify the regulatory regime around the crypto space. However, Congress is unlikely to pass any legislation.

Gensler has the authority to define what constitutes a registered security, which will determine whether the SEC has jurisdiction over coins, crypto exchanges, and other parts of the crypto universe, according to Thomas Gorman, an attorney with Dorsey Whitney who held key positions at the SEC for many years.

The SEC is likely to classify certain crypto investments and platforms as securities under existing law and will require them to register with the SEC.

How rules get adopted

How does the SEC get to change the rules?

The Administrative Procedure Act mandates that the SEC and all federal agencies follow a set of procedures to implement or modify an existing rule. Specifically, a majority of the SEC commissioners (who number five when fully staffed) must propose a rule, request public comments (with a minimum 30-day response time), respond to comments, request additional comments, or propose a final rule. After this, the final rule can be voted on and adopted.

Proposed rule changes are still being considered by the majority.

Getting to that final vote is not always easy, Lynch explains.

The agreement of the SEC commissioners is necessary for the implementation of the rule, which can be a politically charged process. The crucial factor is whether the proposal is supported by the majority.

If the commissioners do not vote on it, it will remain on someone's desk.

Disclosure is a main theme

Gensler's proposed rules emphasize the importance of disclosure.

The debate centers on the amount of disclosure required and how it is utilized, with few opposing it outright.

An SEC watcher, who requested anonymity, stated that the purpose of disclosure is whether individuals possess sufficient information to make informed decisions.

The source emphasized that the objective of regulating product pricing should not be to limit profits. Instead, any hidden fees should be disclosed, but the focus should not be on reducing profits.

What can get done?

Gensler's ambitious agenda has sparked questions among SEC watchers about the feasibility of achieving his goals.

Gorman stated that the main theme from Gensler so far is, "I will examine this, instruct the staff to research it, and consider it."

He's not guaranteeing that he will do this, and it's likely that he will only focus on a few topics, with some disclosures, but significant changes are unlikely.

Gorman expressed doubt that the SEC would pass rules on ESG-type proposals.

He informed me that he would be taken aback if they acted on ESG-type proposals. He stated that environmental regulations would spark controversy, and the SEC would face opposition from the corporate sector if they intervened.

The hostility Gensler has shown toward PFOF is also controversial.

It is unlikely that Gensler will implement a complete ban on PFOF, as it would negatively impact market makers who execute orders on behalf of brokers, as well as the business models of the NYSE and Nasdaq, which also rely on similar payment for order flow arrangements known as rebates.

Once again, more disclosure is the likely outcome.

Andrew Smith, head of investor relations at market maker Virtu, stated that we will have enhanced disclosure and more information for retail investors to make informed decisions at the end of the day.

Gensler has been evasive about his priorities regarding the SEC's decision-making process for 2022, stating in a speech to the Exchequer Club last month that the process is "intentionally flexible" and focuses on getting proposals right based on economic analysis and legal authorities, while also taking into account public feedback.

He informed Bloomberg in a recent interview that the project is a multiyear endeavor and they are taking their time to ensure accuracy.

Wait: there’s even more coming

The SEC is scheduled to meet next Wednesday and is expected to introduce new cybersecurity disclosure and risk management proposals, shorten the settlement time for stock trading (currently T+2), and increase disclosure requirements for private funds.

The SEC is now considering expanding regulations under the Biden administration, much to the surprise of SEC watchers.

Amy Lynch stated that she believes Gensler aims to make the largest impact possible.