HFSC Hearing: SEC Oversight
House Committee on Financial Services
Subcommittee on Oversight and Investigations
Oversight of the SEC
Thursday, June 22, 2023
Topline
- Republicans criticized the SEC’s responsiveness to Congressional inquiries and questioned the agency’s lack of focus on capital formation.
- Democrats defended the SEC’s focus on investor protection, including through the agency’s proposed climate-related disclosure rule.
Witnesses
- Megan Barbero, General Counsel, U.S. Securities and Exchange Commission
Opening Statements
Subcommittee Chair Bill Huizenga (R-Michigan)
In his opening statement, Huizenga noted that even after the landmark decision in West Virginia vs. EPA, some agencies continue to act well outside the bounds Congress instructed them to follow. He emphasized that Congress has the power to conduct oversight and pledged to continue to conduct oversight where needed. Huizenga explained that it is Ms. Barbero’s job to ensure the SEC complies with Congress’ requests, adding that Chair Gensler and the SEC have continued to miss deadlines, offer no accommodations, and blame staff shortages or budget deficiencies. He said it is an insult to Congress and embarrassing for the SEC to imply that the SEC cannot respond to Congress in a timely manner.
Huizenga discussed how the SEC has prioritized rewriting every corner of the capital markets, proposing 46 rules since the start of Chair Gensler’s tenure. He noted many of these rules will upend decades of precedence with little justification. Huizenga said the SEC has prioritized regulation by enforcement in the name of protecting investors and has completely ignored its mission to promote capital formation. He concluded the hearing should have been avoided, but that he had no choice after the SEC’s continued unresponsiveness.
Subcommittee Ranking Member Al Green (D-Texas)
In his opening statement, Green explained the hearing should be titled Republican Micromanagement of the SEC Run Amuck, noting that even though Republicans failed to pass a rule to bring bills to the floor, they are attempting to micromanage the SEC. He said the American people are well-served by an active SEC and concluded that Republicans are putting the SEC’s ability to regulate FTX and other bad actors at risk through burdensome document requests.
Testimony
Megan Barbero, General Counsel, U.S. Securities and Exchange Commission
In her testimony, Barbero explained that the SEC is charged with a three-part mission: protecting investors; maintaining fair, orderly, and efficient markets; and facilitating capital formation. She noted the agency’s work is critical to the functioning of the U.S. and global economies, as well as the financial wellbeing of millions of American households. Barbero outlined the Office of the General Counsel (OGC), which she explained is organized into four groups: (1) Appellate, (2) General Litigation, (3) Legal Policy, and (4) Adjudication and Oversight. She noted that the dedicated oversight function is a recent addition to the office and said the creation of this team reflects a decision by the agency to hire a specialized team of attorneys to improve the Commission’s oversight response capabilities. She assured members that her team, along with staff from the Commission’s Office of Legislative and Intergovernmental Affairs, is working diligently to respond to the Committee’s requests.
Question & Answer
SEC’s Climate-Based Disclosure Rule
Rep. Maxine Waters (D-Calif.) noted there has been an ongoing and extensive comment period for the SEC’s proposed climate-based disclosure rule. She asked if the SEC received comments or other indications whether the climate information required under the proposed rule is materially important for making investment decisions in a company. Barbero said the SEC received a record number of comments in response to the climate proposal, noting many of those comments were supportive of the proposal and the disclosures.
Green asked why the disclosure of climate-related information is material to investors. Barbero said the SEC’s disclosure rules are aimed at providing investors with the information that they need to make informed investment and voting decisions. She noted that information can change over time and added that the SEC has heard from investors that while many companies are providing information about climate-related risk, the information is not provided in a comparable form that is useful to investors.
Capital Formation
Rep. Pete Sessions (R-Texas) said the SEC exists to help with the formation of capital but argued that the SEC has weaponized their discretion against the formation of capital.
Rep. Ann Wagner (R-Mo.) explained that she and Chairman McHenry sent the SEC a letter on April 13, regarding the SEC’s failure to focus on capital formation in its rulemaking agenda. She noted they included a response deadline of April 27 in their letter but did not receive a response from the SEC until June 20. Wagner asked why the response was so delayed and failed to answer any of their questions. Barbero said the SEC needs to ensure they can provide accurate information.
Investor Protection
Rep. Nikema Williams (D-Ga.) explained how the SEC’s mission to protect investors helps level the playing field for marginalized people who are looking to invest their hard-earned money. Williams said Republicans on the Committee are focused on slowing down the SEC’s investigations with unnecessary document requests, which are exposing her constituents to harm by taking precious time away from the other functions of the SEC.
Green asked if the SEC’s proposed climate disclosures were driven by investor protection. Barbero said yes, noting investor protection is a core tenet of the SEC’s disclosure requirements.
FTX
Sessions asked where the meeting between Chair Gensler and Sam Bankman-Fried took place. Barbero said she did not know but pledged to get back to him. Sessions said it’s unprofessional and disingenuous that the Biden Administration had Chair Gensler meet with Sam Bankman-Fried.
Waters noted that last Congress, she initiated a bipartisan investigation into the collapse of FTX, which Chair McHenry has continued. She discussed the SEC’s concerns that some of the materials requested by Committee Republicans would prejudice the ongoing criminal prosecutions and civil enforcement actions. Waters asked how the SEC is balancing legitimate enforcement concerns with the obligation to provide Congress with information. Barbero said the SEC is working to provide the Committee with the information it needs, while not releasing information that could prejudice the criminal trial that is scheduled to begin in October. She explained the challenge is the Committee identified the Commission’s action memo as their priority, but the action memo is the document that contains information which could prejudice our civil enforcement action and the criminal investigation.
Oversight
Huizenga asked Barbero if it’s a productive use of anyone’s time to print public complaints and the SEC’s own enforcement manual and treat that as responsive to the Committee’s requests. Barbero explained that many of the Committee’s requests, including the FTX request, are broad.
Huizenga asked if Barbero was familiar with the Committee’s February climate request. He noted the SEC produced 29,000 pages pulled straight from the public comment file, and 80% of the documents in response to the Committee’s climate request were publicly available. Barbero said the SEC’ rulemakings are conducted in public view and are transparent.
Rep. Sylvia Garcia (D-Texas) asked Barbero to explain the burdens the SEC faces when responding to document requests. Barbero explained that the SEC has frequently produced public documents because those documents do not require a Commission vote to turn them over. She added this allows us the SEC to provide information and respond to Congress more quickly.
Rep. John Rose (R-Tenn.) noted the SEC has produced thousands of pages of non-substantive documents to the Committee and urged Barbero to convince Chair Gensler to approve the release of non-public information to the Committee on a rolling basis.
Rep. Dan Meuser (R-Pa.) said Chair Gensler has shown a pattern of incomplete responses, adding that Gensler is completely inaccessible.
Meuser noted that on average, an S-4 review takes 130 days, and prior to Chair Gensler’s tenure, it was 100 days. He asked Barbero if a 401-day review of a S-4 for a SPAC is unusual. Barbero noted there has been an increase in the number of S-4 forms filed. Meuser said reviews of that length can kill a SPAC, causing investors to lose their money.
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