Leaders in public finance are concerned over the speed and scope of rulemaking happening at the Securities and Exchange Commission.
The SEC is currently working on new rules governing the proposed “consolidated audit trail,” that would track transactions tighter, crypto crackdowns, and climate risk disclosures – a major part of the wider discussion about environmental, social and governance factors that is now influencing the muni bond market.
“Already today, issuers are making climate risk disclosures, and investors are making investment decisions based on those disclosures,” said Gary Gensler, chairman, Security and Exchange Commission in written testimony, referring to rapid expansion of such disclosures in the corporate space.
Gensler’s testimony was dissected during a lengthy, technical, and sometimes contentious House Financial Services Committee hearing on Wednesday. Gensler maintains the SEC plays no role in assessing climate risk and is “merit neutral” on ESG claims.
That claim was refuted by Rep. Andy Barr R – Kentucky, who said, ”The agenda here is not to provide investors with relevant information but instead to redirect capital away from fossil energy. Your proposal would discriminate against fossil energy.”
Gensler’s tenure helming the Commission has come under fire from Congress and muni leaders who compare his rule to the lighter hand of former SEC chair, Jay Clayton.
“The SEC under the current administration has taken an aggressive approach to regulatory modernization, including in the municipal market,” said Michael Decker, SVP federal policy and research, Bond Dealers of America.
Under Gensler’s rule the SEC shortened settlement dates for most broker-dealer security transactions from two days to one, a move designed to benefit investors and reduce the credit, market, and liquidity risks in securities transactions. The critique from the securities side of the industry has been just as harsh.
“The SEC’s unprecedented regulatory change, without any mandate, to enact so many new rules threaten market liquidity, market integrity, and the savings of America’s working families,” said Chris Iacovella, president and CEO of the American Securities Association. ”The rulemaking process is being rushed, done without substantive economic analysis, and in many cases, without any statutory authority.”
A dissenting voice to the narrative emerged during the hearing, coming from Rep. Brad Sherman D- Calif., who said, “According to a Bloomberg study, you’re actually producing fewer regulations than recent predecessors.”
Sherman also provided Gensler with cover on why the SEC needs to keep a finger in the climate change disclosure debate. “ESG is material to investors,” he said. “It will affect trillions of dollars of investment decisions. That’s why corporate America is trying to prevent you from getting that information to the investors.”
While current SEC regulations on ESG do not directly impact munis, experts are watching the progression of that regulatory process for hints about what the SEC might eventually attempt in the muni space. Under federal law, the SEC does not have authority to dictate the content of pre-issuance disclosures by muni issuers.
The Commission has also overseen the contentious Financial Data Transparency Act which seeks to purge PDF documents from the disclosure system in favor of machine-readable formats. The rule was perceived by many in the muni world as an expensive solution to a problem that didn’t exist that will be funded by issuers.
“The speed, breadth, and volume of regulatory change at the SEC will have sweeping and potentially unknown implications,” said Kenneth E. Bentsen, Jr., COO, president at the Securities Industry and Financial Markets Association. “The SEC has a duty to ensure the changes they make to our capital markets are thoughtful and protect the health of our financial system, and that the costs do not far outweigh any perceived benefit.”
Democrats on the committee also made a point of drawing out the effects of a government shutdown on the SEC. “We have just under 5,000 employees and probably 92% or 93% will be furloughed,” said Gensler. We’ll be down to a skeletal staff.”