WSJ Op-ed – Gary Gensler’s “Assault on U.S. Capital Markets”
“In 14 months, the SEC chairman has issued 23 proposed rules. Many won’t survive legal challenge”
The Wall Street Journal published an op-ed authored by Hal Scott, an emeritus professor at Harvard Law School and director of the Committee on Capital Markets Regulation, and John Gulliver, the committee’s research director. Mr. Scott and Gulliver criticize U.S. Securities and Exchange Commission (SEC) Chair Gary Gensler for issuing burdensome rules that would hurt businesses, workers and retirees who rely on the private funds industry for capital or investment returns.
“Mr. Gensler often claims that his regulatory agenda is intended to protect retail investors. Instead he is shrinking the U.S. capital markets and reducing opportunities for all investors. Congress and the courts need to rein him in.”
Gary Gensler’s Assault on U.S. Capital Markets
The Wall Street Journal
By Hal Scott and John Gulliver
July 17th, 2022
U.S. capital markets are the world’s envy. Gary Gensler’s job as chairman of the Securities and Exchange Commission is to protect and promote them. Instead he’s attacking them.
After first refusing to enforce Trump-era regulations on proxy-advisory firms, which advise institutional investors how to vote on shareholder proposals, the SEC voted 3-2 last Wednesday to roll them back. Glass Lewis and Institutional Shareholder Services dominate the market in the U.S., and the now-rescinded regulations sought to constrain their corporate-governance duopoly by subjecting them to challenge from public companies, which will continue to lack recourse against proxy advisers that push political priorities at the expense of shareholder returns.
In the 14 months since Mr. Gensler took office, the SEC has issued 23 proposed rules that await adoption. They cover every corner of capital markets: public companies, mutual funds, private funds and broker-dealers. Each of the three preceding SEC chairmen—appointed by presidents of both parties—issued about half as many proposals in their first 14 months. Mr. Gensler—unlike commissioners who oversaw the aftermath of the dot-com accounting scandal in the early 2000s and the global financial crisis of 2007-08—has no mandate for sweeping reform. His aggressive agenda seems to have more to do with the need to appeal to progressive activists, perhaps in hope of attaining higher executive office.
Mr. Gensler’s first target was special-purpose acquisition companies, or SPACs, blank-check entities that exist to bring private companies public. SPACs have been the primary factor in the rising number of initial public offerings in recent years, particularly by smaller firms, for which they made the process easier and ensured better pricing.
This innovative market—now being copied abroad—experienced nearly a 75% reduction when Mr. Gensler’s agency submitted a new regulatory proposal in March. Without any legislative basis or opportunity for comment, the SEC’s proposal declared that advisers on SPACs—including banks—were already subject to liability as underwriters for de-SPAC merger transactions, the second step in bringing private companies public.
The SEC then began taking measures that might force companies out of the public market. In March the commission voted 3-1 to advance a proposed rule requiring public companies to disclose their climate risks, often even when such information isn’t “material” to investors under long-established tests. Under the new rule, companies would be forced to report greenhouse-gas emissions generated directly by their operations and indirectly via their energy consumption. Europe has mandated similar requirements for public companies, but those in the U.S. would be subject to substantial class-action litigation risk for errors in climate disclosures. The risk and cost of climate-disclosure errors is particularly high because of the undeveloped state of climate forecasts.
Mr. Gensler has also signaled interest in restricting the ability of retail brokers to receive payments from wholesale brokers that handle orders, a system known as “payment for order flow.” The SEC would substitute an entirely new and untested system of auctions for retail orders. The new process would likely result in the return of brokerage commissions, which served as a barrier to young and low-income investors’ entry into the stock market. Mr. Gensler has also stated that the SEC may soon mandate disclosures of corporate board diversity. And former Commissioner Allison Lee has suggested that the SEC may limit the ability of private companies to raise capital from private-equity and venture-capital funds by effectively reducing the number of investors in private companies—a matter now on its official agenda.
What can be done to save capital markets from this assault? Congress should exercise its oversight authority over the SEC by demanding that Mr. Gensler halt his high-speed regulatory attack until the commission evaluates the overall impact of its proposals on U.S. capital markets. A recent release by the Committee on Capital Markets Regulation shows that, while 11 SEC proposals apply to public companies and 10 apply to mutual funds, the SEC has failed to evaluate the overall burden and overlapping requirements of these proposals on these companies or funds.
Many of the agency’s proposals will take time to be issued in final form, and those not yet final for 60 days could be overturned through the Congressional Review Act—a much likelier prospect if Republicans take majorities in both chambers in November. President Biden could veto such resolutions to overturn regulations, but that would require him to spend political capital and perhaps antagonize lawmakers with whom he has to work.
Mr. Gensler’s rules face a more certain threat in court. Many may be struck down because of the SEC’s failure to conduct meaningful cost-benefit analysis, as required by its own statute, or because of a rushed agenda without adequate notice and comment, both in violation of the Administrative Procedure Act.
Many of the rules may also be struck down in light of the Supreme Court’s decision last month in West Virginia v. Environmental Protection Agency, which found that federal agencies need specific authorization from Congress before issuing regulations that deal with “major questions.” The SEC’s proposed climate-disclosure rule is similar to the EPA’s Clean Power Plan in this regard, as Paul Atkins and Paul Ray recently wrote in these pages. That’s true of other rules as well. If the commission doesn’t rethink its rules, it will embroil the capital markets in prolonged litigation and ultimately find itself on the losing end of lawsuits, damaging its credibility at home and abroad.
Mr. Gensler often claims that his regulatory agenda is intended to protect retail investors. Instead he is shrinking the U.S. capital markets and reducing opportunities for all investors. Congress and the courts need to rein him in.
Mr. Scott is an emeritus professor at Harvard Law School and director of the Committee on Capital Markets Regulation. Mr. Gulliver is the committee’s research director.