September 5, 2023

Will the SEC beat the clock on the Gensler agenda?

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In an article in 2022, Politico reported that SEC Chair Gary “Gensler has come under fire for the pace of rulemaking coming out of the agency, with critics claiming that dissecting the flood of new proposals in such short periods of time is impractical. Gensler has pointed out that the number of proposals [is] largely on par with what former SEC chairs like Clayton have done. The latest proposals have just been more clustered than in the past, Gensler said.” That’s a response that I’m sure I’ve heard any number of times during Congressional hearings. Is that still the case? To find out, Bloomberg performed a count of SEC records from 2001 to 2023 to assess the extent of rulemaking in the first two years, four months and one week into the tenures of several of the SEC Chairs over that period who were confirmed to lead the SEC at the start of a new administration. The answer? Yes and no. According to Bloomberg, the “SEC under Chair Gary Gensler is issuing regulations at its slowest pace in decades for a new presidential administration,” having adopted just 22 final rules since his tenure began in 2021. By comparison, over the same periods, the SEC under Jay Clayton had adopted 25 final rules, under Mary Schapiro, 28 rules, and under Harvey Pitt, a whopping 34 rules (many implementing the SOX mandate). So were all the complaints about the tsunami of rulemaking just misguided? Not exactly. As Bloomberg notes, “[d]espite trailing his recent predecessors on final rules, Gensler’s proposal tally of 49 exceeds Clayton’s 28 and Pitt’s 48, but is less than Schapiro’s 65.” [Emphasis added.] For the agenda of the Gensler administration, that leaves quite a chasm at this point between rules that are final and rules that are just proposed. What might that mean for SEC priorities? Bloomberg takes a deep dive.

According to Bloomberg, the current gulf between proposed and final rules risks leaving a number of agenda items unfinished. Potentially, Bloomberg reports, “Gensler has less than a year and a half before Republicans could take control of the SEC in a new administration, raising expectations the commission intends to finalize a flurry of environmental, social and governance regulations and other rules in the coming months….Legal and congressional threats to derail Gensler’s plans for corporate greenhouse gas emissions reporting, workforce disclosures and other rules are growing as 2025 nears, with the possibility of a GOP-controlled government.” Shortly after the SEC climate disclosure proposal was released, Bloomberg observes, several business interests and about two dozen Republican state attorneys general threatened legal action, with the sharpest criticism reserved for the Scope 3 GHG emissions disclosure requirement. Gensler has responded that “he’s heard concerns ‘loud and clear.’ But the chair has declined to say how the climate disclosure proposal may change before it’s finalized—or confirm whether October is a realistic target for finishing it.”

SideBar

At a Senate Banking, Housing and Urban Affairs Committee hearing in 2022, a number of Committee members took aim at the SEC’s climate disclosure proposal—particularly Scope 3 disclosure. Most notably, then-Senator Pat Toomey warned that the SEC should consider itself to be on notice from the courts. Toomey considered the climate proposal to be readily subject to challenge under the “major questions doctrine” enunciated by SCOTUS in West Virginia v. EPA (see this PubCo post): given the economic and political significance of the rulemaking, the SEC would need to point to clear Congressional authority. This rulemaking, in his view, seemed to fall easily under the doctrine: the rule would involve a novel approach; would require technical and policy expertise not typically needed by the agency; as a consequential decision, was unlikely to have been left by Congress to the agency; and had previously been rejected by Congress in similar form before. The SEC cannot use a novel interpretation of a statute to “pretend” it has authority, he said. Because, he believed, the SEC did not have Congressional authorization for the proposal, he advocated that the SEC rescind the proposal. Gensler’s responses made clear that he heard the criticisms, both from the Committee and from commenters, and that there would be some changes to the proposal as the SEC tries to “find a balance.” (See this PubCo post.) At a hearing held by the House Subcommittee on Financial Services and General Government at the end of March 2023, Gensler was similarly faced with a subcommittee on a mission about the SEC’s climate proposal. One member even went so far as to suggest that the climate proposal represented a “weaponization” of the SEC. (See this PubCo post.)

Bloomberg has its eye on the clock, which could affect both the defense of any litigation challenging new rules and possible Congressional action to undo them. If a climate disclosure rule is adopted this year, for example, any litigation that might be commenced shortly thereafter is unlikely to be resolved by 2025. If Republicans were to win the presidency in 2024 and take control of the SEC in January 2025, Bloomberg posits, a “Republican-led SEC would have the power to end its defense of the rule,” although environmental organizations could step in to defend the rule. Another challenge might arise with regard to the climate disclosure regulation “if the SEC punts the regulation too far into next year. A federal law, the Congressional Review Act, would let a Republican-controlled House and Senate in the next Congress quickly revoke regulations the SEC and other agencies issued in late 2024, if they avoid a presidential veto.” To avoid action under the CRA, the article notes, “Gensler only has to finalize the climate rule within about a year.” But other possible rulemakings—especially those that have appeared on prior agendas but have yet to make it out of the starting gate—could well be in jeopardy under the CRA, if the GOP were to win the White House and majorities in Congress, that is. Examples might include plans for human capital management disclosure and for disclosure regarding corporate board diversity. On the SEC’s most recent agenda, the target dates for issuance of these proposals are October 2023 and April 2024, respectively. (See this PubCo post.)

SideBar

You might remember that one of the many permutations of the SEC’s rules on Disclosure of Payments by Resource Extraction Issuers, mandated under Dodd-Frank, was jettisoned in 2017 under the Congressional Review Act. With the change of administrations in 2017, under the CRA, any rules that became final after May 31, 2016, could be disapproved by a simple majority vote in Congress and a Presidential signature. The final Resource Extraction Disclosure Rules were adopted on June 27, 2016 and, on February 14, 2017, a bill tossing out the resource extraction payment disclosure rules was signed. (See this PubCo post.) Prior to that, according to the Congressional Research Service, “[o]f the approximately 72,000 final rules that have been submitted to Congress since the [CRA] was enacted in 1996, the CRA has been used to disapprove one rule: the Occupational Safety and Health Administration’s November 2000 final rule on ergonomics, which was overturned using the CRA in March 2001.” That’s because the stars are rarely in proper alignment: generally, the Service indicates, for successful use, there will have been a turnover in party control of the White House and both houses of Congress will be majority–controlled by the same party as the President. Of course, a new, substantially revised, rulemaking implementing the Dodd-Frank resource extraction disclosure mandate was adopted in 2020 (see this PubCo post), and still survives to this day…or does it? The SEC’s spring 2023 agenda shows that Corp Fin is considering whether to recommend that the SEC review the rules to determine if additional amendments might be appropriate. The agenda previously identified April 2023 as the target date for issuance of a proposal, then October 2023 and now April 2024. (See this PubCo post.)

In 2021, when there was again a single-party sweep, there was a lot of speculation about the extent to which Congress would take advantage of the CRA to dispense with some of the “midnight regulations” adopted during the prior administration. A joint resolution was introduced in Congress providing for Congressional disapproval of the SEC’s 2020 shareholder proposal amendments, which, among other things, amended Rule 14a-8 to modify the eligibility criteria for submission of shareholder proposals and the resubmission thresholds, and were the subject of strong dissents from the Democratic SEC Commissioners when those amendments were adopted. (See this PubCo post.) The resolution simply provided that Congress disapproved the rule and, as a result, the rule would have no force or effect. Although ultimately, the resolution was not adopted, in 2022, the SEC proposed new amendments to Rule 14a-8 that the dissenting Republican SEC Commissioners viewed as an effort to undo or circumvent some aspects of the 2020 amendments. For example, Commissioner Mark Uyeda said that the proposed amendments could “effectively nullify the 2020 amendments to the resubmission exclusion and render this basis almost meaningless.” (See this PubCo post.)

As noted above, Gensler has faced much pushback from Republicans in Congress and elsewhere, as well as from some in the business community, about the scale of the SEC’s jam-packed agenda, particularly in the absence of an express legislative mandate. While many of the rules adopted during Schapiro’s and Pitt’s tenures, Bloomberg indicates, were expressly mandated by specific legislation—Dodd-Frank and SOX—Gensler cannot say the same, pointing instead to general authority under the securities laws and investor demand. (This article from the FT states that, while 59% of the 22 proposals issued during the first two years of the tenure of Mary Jo White were mandated by Dodd-Frank and other specific legislation, only 17% were so mandated under Gensler’s tenure.) Bloomberg also points to a 2022 report from the SEC’s then-acting inspector general, which “found Gensler’s rulemaking approach was too rushed and could hurt the agency’s health,” and to a warning from the Securities Industry and Financial Markets Association, SIFMA, about “Gensler’s ‘far-ranging and aggressive rulemaking agenda,’ projecting that he’s on track to propose and finish 65 rules.” On the other hand, Bloomberg observes, the climate disclosure proposal appears to be consistent with the White House agenda: President Biden’s “2020 campaign climate plan included a pledge to require ‘public companies to disclose climate risks and the greenhouse gas emissions in their operations and supply chains.’” As to Gensler’s strategy of employing a more cautious, considered process for adoption of final rules—as opposed to the flurry of proposals issued—the president and CEO of investor advocacy group Healthy Markets Association told Bloomberg that “he’s hopeful Gensler’s rush to propose rules and caution at adopting them quickly will lead to stronger regulations.” While there are “risks with this strategy,” he said, “the reward is that they have a more informed rulemaking that’s more likely to withstand legal challenge.”

An SEC spokesperson told Bloomberg that Gensler is “focused on getting things right—based upon the economics, the Commission’s legal authorities, and promoting the SEC’s mission—not the clock.” As to the remaining agenda, SEC Commissioner Hester Peirce advised Bloomberg that “she’s bracing for busy months ahead. ‘When he puts something on the agenda, it’s not on there for fun….It’s something that he’s actually looking at doing.’”

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