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The SEC's spring rulemaking schedule portends a busy compliance season

With an ambitious regulatory agenda that includes new disclosure requirements for public companies on climate-related risks, human capital, cybersecurity, and environmental, social, and governance (ESG) initiatives for investments, the Securities and Exchange Commission (SEC) is moving quickly.

The agency unveiled its regulatory agenda for spring 2022 on Wednesday, including more than 50 proposed regulations covering a wide range of topics, including short selling, special purpose acquisition companies (SPACs), and codifying several Dodd-Frank Act regulations that have not yet been codified 12 years after the law's passage. The agenda is noteworthy, however, because many of the SEC's contentious rule amendments are nearing completion and may be approved by the organization before the end of the year.

The agenda states that the SEC must take a final decision on its climate-related disclosure rule by the end of October. All publicly traded companies would be required to quantify, measure, and disclose their impact on the environment under the rule, which is a broad potential mandate. It would require publicly traded companies to provide information on how risks related to climate change affect their strategy, business model, and outlook, how their board of directors and management handle climate-related matters, and any plans they have to reduce their carbon footprint.

The Dodd-Frank regulations on incorrectly awarded compensation, pay vs. performance, and enhanced reporting on proxy and executive compensation votes, as well as the regulations shortening the settlement cycle for all securities trades from two days to one day and amending the electronic recordkeeping requirements for broker-dealers, security-based swap dealers, and major security-base dealers are all scheduled for final action in October.

Ken Joseph, managing director at Kroll who previously worked at the SEC for 21 years, including as a senior officer in the Division of Examinations, said of the agenda, "it is the most ambitious agenda that I’ve ever seen—and the most aggressive."

The agenda, he claimed, could come under fire for being overly ambitious, too far from the commission's normal focus on investor protection, and too close to politically sensitive issues.

The scope and timing of the proposed changes are a major concern, according to Mark White, principal securities manager for Wolters Kluwer Compliance Solutions.

He remarked, "I wonder how the swiftness (of the approvals) is going to affect companies. It could be a regulatory nightmare."

The agenda, according to Erin Martin, a partner at Morgan Lewis who worked for the SEC for the previous 13 years in the Division of Corporation Finance, shows unequivocally that the organization has given its climate-related disclosure rule top priority. But given that the comment period just ended last week, the October deadline for a vote is probably not realistic.

“It’s really hard to know how much weight to put on the timing of implementation and adoption,” Martin said.

"I wouldn’t use those (October) dates as firm indicators," said Lance Dial, a partner at Morgan Lewis. "It indicates they are on the front burner; whether it’s in the next six months or a year, it’s hard to say."

The disclosure rule related to climate change is still up for debate. The requirement that businesses disclose climate-related risks that might have an impact on their bottom line has some merit, according to Joseph. He praised the rule's noble intention to increase transparency regarding these matters. However, he noted that some requirements of the rule, such as measuring and reporting greenhouse gas emissions from third parties, will be challenging to adhere to.

Additionally, he said, both big and small businesses will find the cost of complying with the rule and many others to be a significant burden.

"The myriad of different rules that could be adopted in the next year will cause corporations and their compliance departments to have to contend with a lot of new requirements," Joseph said. "The increasing cost and disruptions caused by these rules is a factor that cannot be ignored ."

One glaring omission stands out among all the rules being advanced, according to White: none attempt to regulate blockchain technology, digital assets like cryptocurrency, and nonfungible tokens.

"These newer financial vehicles are really making waves in the financial industry, like nothing ever has, probably," he said.

Blockchain technology is also employed by bad actors in a number of ways, including evading sanctions, defrauding investors, and serving as the preferred means of payment for ransomware and other forms of cybercrime.

“There’s nothing on the agenda to combat that at this point, which is really interesting to me,” he said.

Final consideration of rules intended to limit insider trading, enhance reporting requirements for hedge and private equity funds, enhance how businesses manage cybersecurity breaches, and more has been deferred until April 2023.

According to Joseph, the proposed new regulations could "radically alter" how hedge and private equity funds operate in particular.

Rules aimed at improving disclosures on human capital management, increasing diversity on corporate boards, improving disclosure rules for investment firms on ESG fund naming and strategies, and SPACs are still in the proposed rule stage and have no set date for final consideration.

According to a press release from SEC Chair Gary Gensler, "when I think about the SEC’s agenda, I’m driven by two public policy goals: continuing to drive efficiency in our capital markets and modernizing our rules for today’s economy and technologies. Doing so will help us to achieve our three-part mission: protecting investors; maintaining fair, orderly, and efficient markets; and facilitating capital formation"

Hester Peirce, a Republican commissioner, claimed that the agency is spending its limited resources on advancing "rulemaking proposals disconnected from our core mission."

She said in a statement that "the agenda continues to shun issues at the core of our mission in favor of shiny objects outside our jurisdiction. We used to focus on companies’ disclosure of economically material information; we now focus on disclosure of hot-button matters outside our remit."

Enhanced disclosure requirements on climate-related risks and human capital management, as well as a mandate to increase board diversity, are among the proposed regulations that Peirce claimed fall outside the agency's purview. She also criticized Gensler's SEC for enacting significant regulatory changes without seeking "meaningful input" from the public, public companies, or investors who would be impacted.



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