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PLI SEC Speaks

The SEC Speaks in 2022  

Practicing Law Institute

Thursday, September 8, 2022

Topline

  • Gensler focused his opening remarks on crypto security tokens and asserted the SEC’s authority over these tokens and their satisfaction of the Howey test. He also insisted that crypto brokers and exchanges comply with securities laws.
  • Bartmann said examinations relating to Reg BI should be expected to come up next year. Russell said staff is considering future bulletins to provide views on topics including consideration of cost and reasonably available alternative.
  • Atkins pointed out the controversial nature of the Form PF proposal, called it a huge overreach, and noted the uncertainty of how the proposal will be treated by the courts.
  • McGowan said the Division is considering recommending that the Commission propose rule amendments to require electronic submission of filings by broker-dealers, security-based swap dealers, self-regulatory organizations (SRO), and clearing agencies.
  • Shillman said the decision on how CAT will be funded will be made early next year likely by splitting the cost three ways among different market participants.
  • Staff also announced possible new enhanced disclosure requirements regarding how the Russian war with Ukraine has or will impact businesses due to supply chain disruptions and rising inflation levels.
  • Staff discussed the need for enhanced disclosers of material information about emerging risks regarding the war in Ukraine, supply chain issues, and inflation.

Chair’s Remarks

In his opening remarks, SEC Chair Gary Gensler explained that securities laws are applicable regardless of the technology, including cryptocurrency (crypto) and that the vast majority of crypto security tokens are securities. He said he has asked the SEC staff to work directly with entrepreneurs to get their tokens registered and regulated, where appropriate, as securities.

Gensler also distinguished non-security tokens from security tokens and said crypto non-security tokens might meet some parts of the Howey Test or other tests of a security, but not necessarily all of them, and may not be securities. He also said the “derived from the efforts of others” part of the Howey test is met by crypto security tokens and that most crypto tokens are investment contracts under Howey. He recognized that, “[g]iven the nature of crypto investments, . . . it may be appropriate to be flexible in applying existing disclosure requirements.” He then added that “[t]ailored disclosures exist elsewhere – for example, asset-backed securities disclosure differs from that for equities.” Gensler stated that, depending on a stablecoin’s attributes, they may be shares of a money market fund or another kind of security and if so, they would need to register and provide important investor protections.

He then said given that many crypto tokens are securities, it follows that many crypto intermediaries are transacting in securities and have to register with the SEC in some capacity, adding that crypto investors should get the protections they receive from regulated broker-dealers. He also pointed out that many crypto intermediaries provide lending functions for a return and that if a lending platform is offering and selling securities, it too comes under SEC jurisdiction. Gensler said he has asked staff to (1) work with intermediaries to ensure they register each of their functions — exchange, broker-dealer, custodial functions, and the like — which could result in disaggregating their functions into separate legal entities to mitigate conflicts of interest and enhance investor protection and (2) sort through how we might best allow investors to trade crypto security tokens versus or alongside crypto non-security tokens. He also said he looks forward to working with Congress to provide the Commodity Futures Exchange Commission (CFTC) with greater authorities over non-security tokens.

Division of Investment Management

Panelists

  • William A. Birdthistle, Director, Division of Investment Management
  • Timothy Husson, Associate Director, Analytics Office, Division of Investment Management
  • Melissa Roverts Harke, Assistant Director, Investment Adviser Regulation Office, Division of Investment Management
  • Michael Spratt, Assistant Director, Disclosure Review and Accounting Office, Division of Investment Management
  • Thoreau Bartmann, Assistant Director, Chief Counsel’s Office, Division of Investment Management
  • Paul S. Atkins, Commentator

Bartmann discussed the special purpose acquisition company (SPAC) rulemaking and his Division’s involvement in the safe harbor part of the proposal. He said his Division is also involved in guidance on a number of final rules, including the derivatives rule for mutual funds, the fair value rule for mutual funds, and the marketing rule, and said he has been engaged with industry on these proposals. Bartmann then discussed the staff bulletin on Reg BI and his division’s work on staff guidance in the form of bulletins on different issues and that examining for these standards is a priority and that exams related to this will come up next year. He also said, regarding broker-dealer conflict of interest, that staff expects to release one more bulletin on care obligations this winter. Atkins prompted the panel to address guidance on digital assets, particularly uncertainty around custody issues. Harke said custody of digital assets is on the Commission’s rulemaking agenda.

Spratt discussed the SEC’s ESG proposals and said the SEC is looking for how central ESG criteria are to the investment selection process, what kind of criteria the fund is focusing on, and whether there are any ESG risks to disclose to investors. He added that if a fund has an ESG name, that fund should expect the SEC to ask about them about the 80 percent rule.

Harke highlighted six proposals since January in the investment management space, including the private fund advisors proposal, the cybersecurity proposal, the ESG rules for investment advisors and funds, the Names rule, the Form PF proposal, and the request for comment on information providers. She stated that one of the proposals that caused the biggest stir was the private fund advisors proposal.

Atkins pointed out the controversial nature of the Form PF proposal, called it a huge overreach, and noted the uncertainty of how the proposal will be treated by the courts.

Division of Trading and Markets

Panelists

  • Haoxiang Zhu, Director
  • Michael A. Macchiaroli, Associate Director
  • Thomas K. McGowan, Associate Director
  • Emily Russell, Chief Counsel (remote participant)
  • Jeffrey S. Mooney, Associate Director
  • Carol McGee, Associate Director
  • David S. Shillman, Associate Director
  • Eric Juzenas, Associate Director
  • Roberta S. Karmel, Commentator
  • Laura S. Unger, Commentator

McGowan said the Division is considering recommending that the Commission propose rule amendments that will require electronic submission of filings by broker-dealers, security-based swap dealers, self-regulatory organizations (SRO), and clearing agencies, many of whose reports are currently filed on paper. He added that paper filings can be incredibly inefficient.

Russell said the Commission has continued to focus on Reg BI and Form CRS reliance and that staff have released two new bulletins on standards of conduct and is considering future bulletins on additional topics including consideration of cost and reasonably available alternative.

Shillman discussed the Consolidated Audit Trail (CAT) and how it has taken longer than anticipated for implementation. He said the exchanges, broker-dealers, and FINRA are all reporting equity and options orders, that CAT is scheduled to be fully implemented in December, but that it is still to be determined how CAT will be funded. He stated that a decision on funding should be made by early next year.

Remarks by Office of the Advocate for Small Business Capital Formation Deputy Director Sebastian Gomez Abero

Abero highlighted the 10th anniversary of the JOBS Act and discussed how it changed the playbook for raising capital. He concluded by discussing the new SEC capital raising hub and how it is has been a positive benefit for small businesses looking to raise capital.

Division of Corporation Finance

Panelists

  • Renee Jones, Director
  • Erik Gerding, Deputy Director, Legal & Regulatory Policy
  • Cicely LaMothe, Acting Deputy Director, Disclosure Operations
  • Michael P. Seaman, Chief Counsel
  • Ted Yu, Chief of the Office of Mergers & Acquisitions
  • Paul S. Atkins, Commentator

Jones discussed some of the feedback the Division of Corporate Finance received regarding the climate-related disclosure proposal, adding that investors seem to be very supportive of the proposal. Atkins asked whether the Commission is aware of the Supreme Court opinion related to federal agencies fighting climate change. Jones said the Commission is and will be taking the Court’s opinion into consideration when crafting the final rule.

Gerding discussed several proposed rules regarding pay verses performance, SPACS, cybersecurity, 10b5-1, and share buybacks. Atkins asked whether the Commission spoke with other governmental agencies prior to drafting the proposed cyber-security rule. Gerding said they did.

LaMothe said the SEC will be staffing the new Office of Crypto Assets with one legal branch and one accounting branch. She discussed the three emerging risks where enhanced disclosure requirements will be needed, including the material impact of the war in Ukraine, supply chain disruptions, and rising inflation levels. She urged companies to avoid boiler plate language when disclosing emerging risks and concluded by discussing disclosure surrounding board leadership structure and board risk oversight. She noted that the Commission is also considering enhanced corporate governance disclosure requirements.

Aktins said, as it relates to the climate-related disclosure rule, the term “decision useful” is very subjective and not material, adding that it not within the authority of the Commission to deem whether something is “decision useful” for an investor.

Remarks by Office of Minority and Women Inclusion Chief Diversity Officer Pamela A. Gibbs

Gibbs discussed the importance of diversity and inclusion as well as the progress made at the SEC in diversity to help further innovation.

Accounting

Panelists

  • Paul Munter, Acting Chief Accountant, Office of the Chief Accountant
  • Lindsay McCord, Chief Accountant, Division of Corporation Finance
  • Jenson Wayne, Chief Accountant, Division of Investment Management
  • Cynthia Glassman, Commentators

Munter discussed the priorities of the accounting office and the quality of information being reported by businesses, including foreign entities. Wayne discussed custody of crypto tokens and how the SEC has been working on how best regulate digital assets.

Workshop C: Division of Corporation Finance

Panelists

  • Dan Morris, Special Counsel, Disclosure Review Program, Division of Corporation Finance
  • Terence O’Brien, Accounting Branch Chief, Disclosure Review Program, Division of Corporation Finance
  • Jennifer López Molina, Legal Branch Chief, Disclosure Review Program, Division of Corporation Finance
  • Anne Parker, Office Chief, Disclosure Review Program, Division of Corporation Finance
  • Tamara R. Brightwell, Program Director, Disclosure Review Program, Division of Corporation Finance
  • Jessica Kane, Program Director, Disclosure Review Program, Division of Corporation Finance

Morris discussed how the war in Ukraine, supply chain issues, and inflation could potentially cause a material impact on companies and the need to require enhanced disclosure requirements. Parker discussed ESG and climate risk disclosures, stating that indirect weather impacts are affecting customers and suppliers and that disclosures are particularly important for companies that are more prone to the impact of weather events. Molina discussed how some China-based issuers are looking for carve-outs from requirements and regulations and said that issuers should clarify risks for China and all its territories, including Hong Kong, if applicable.

For more information on this event, please click here.

For an archive of past SIFMA hearing coverage, please click here.