From the Securities and Exchange Commission (SEC)
SEC issues discretionary stay on climate disclosure rules
On April 4, 2024, the SEC issued a voluntary stay on its recently issued climate-related disclosure rules, pending judicial review in the U.S. Court of Appeals for the 8th Circuit. This case consolidates challenges brought through multiple appellate courts following the rules’ adoption. In the order, the SEC states that the voluntary stay will allow for an “orderly judicial resolution” and avoid regulatory uncertainty. The SEC maintains that the final rules are “consistent with applicable law and within the Commission’s long-standing authority to require the disclosure of information important to investors” and notes it will continue “vigorously defending” the final rules.
SEC adopts amendments to internet investment adviser exemption
On March 27, 2024, the SEC adopted final amendments to the internet investment adviser exemption under the Investment Advisers Act of 1940. The amendments revise qualifying criteria for the exemption, which allows internet-based advisers to register with the SEC. Under the amendments, advisers must provide ongoing investment services to all clients exclusively through an operational, interactive website or similar digital platform throughout the time that it relies on the exemption. The amendments also eliminate the de minimis threshold that previously permitted such advisers to maintain fewer than 15 non-internet-based clients in the preceding 12 months.
The final rule becomes effective July 8, 2024.
SEC issues video statement on AI washing
On March 18, 2024, the SEC issued a short informational video warning against the dissemination of false or misleading claims on the use of artificial intelligence (AI), also known as AI washing. In the video, Chair Gary Gensler stated that investment advisers, broker-dealers, and public companies that make claims regarding the use of AI models in their investment strategies or their business must ensure that these claims are truthful and have a reasonable basis, or they risk violating securities laws.
Chair speaks on mandatory disclosures
On March 22, 2024, Gensler made remarks before the Columbia Law School conference honoring Professor John C. Coffee. Gensler shared his belief in the merits of mandatory disclosures, describing information on securities as a “public good.” Although they impose additional burdens on registrants, Gensler stated that such disclosures are vital to provide investors with meaningful information given the “imperfect alignment” of management and shareholder interests.
Gensler highlighted the SEC’s recent activity regarding mandatory disclosures – including climate, cyber risk, and executive compensation – and drew parallels to past rulemaking that Gensler described as sparking controversy at the time of adoption but integral to the current disclosure regime.
SEC participates in Practising Law Institute’s “SEC Speaks” conference
Several commissioners and directors made remarks before the Practising Law Institute’s “The SEC Speaks in 2024” conference, April 2-3, 2024.
Gensler spoke on the history of the SEC, emphasizing the agency’s foundational role in promoting the “key public goods” of greater trust and greater efficiency and competition in the capital markets through oversight of exchanges, broker-dealers, and securities trading in secondary markets. Gensler stated that these public goods, which encourage greater capital formation and liquidity, could not be achieved based on private incentives alone and must be promoted through enforcement. He summarized historical and present-day rulemaking activity covering clearance and settlement, exchanges and alternative trading systems, the National Market System, best execution, and order competition and execution quality.
Commissioner Hester Peirce expressed concerns regarding current rulemaking practices, which she described as consisting of “very broad proposals, unreasonably short public comment periods, pared back final rules with substantial elements on which the public has not commented,” and lack of meaningful post-adoption engagement with the public. Peirce issued a call to action outlining priorities for the SEC, staff, and market participants, whom she encouraged to be persistent and intentional in engaging with the agency. She also criticized Staff Accounting Bulletin 121, referencing her own past remarks on the “secret garden” of practice-defining SEC staff guidance.
Commissioner Mark Uyeda also remarked on recent rulemaking, voicing criticism of rules that potentially mandate disclosures that are not financially material to investors and therefore fall outside the commission’s authority to regulate. Referencing past regulations on conflict minerals, Uyeda warned against the danger of enacting new disclosures that effect unintended consequences – for example, for the climate rule, the potential to inadvertently increase outsourcing or discourage commitments to emissions reductions targets to avoid triggering disclosure requirements.
Division of Enforcement Director Gurbir Grewal spoke on enforcement issues, focusing on crypto enforcement actions and addressing recent criticism of the division. Grewal described the enforcement approach as “consistent, principled, and tethered to the federal securities laws and legal precedent,” emphasizing that the SEC transparently and consistently applies the well-established “Howey test” to evaluate whether a certain crypto product is a security. Condemning the “predatory inclusion” tactics used by certain crypto entities, and underlining the “devastating” impacts to victims of past cases of unlawful tactics and schemes, Grewal stressed the importance of the division’s work to protect the investing public. Grewal concluded by stating that the division must prioritize maintaining public trust by acknowledging its mistakes and will embrace any scrutiny it faces.
Following Grewal, Division of Enforcement Deputy Director Sanjay Wadhwa highlighted the division’s work in fiscal year 2023 and addressed its recent actions and approach on two ongoing enforcement initiatives: the recordkeeping initiative and the amended marketing rule initiative. Wadhwa summarized the factors considered to determine the size of the penalty levied against each investment adviser, broker-dealer, or credit ratings agency for recordkeeping violations. Such factors include the size of the firm, the scope of violations, the historical precedence, and the firm’s proactive compliance efforts. Wadhwa emphasized that self-reporting is the “most significant factor in terms of moving the needle on penalties” but stated that a firm that does not self-report may still “receive credit” based on its cooperation with an investigation. In addition, Wadhwa noted that assets under management, regulatory history, promptness of remediation, and the need to “send strong messages of accountability and deterrence” are all considered when assessing penalties for violations of the amended marketing rule and that, as with all cases, self-reporting and cooperation are significant factors.
CorpFin addresses priorities at the “SEC Speaks” conference
At the conference, senior officials from the Division of Corporation Finance (CorpFin) spoke on recent rules – highlighting key aspects of the SEC rules on climate disclosures, special purpose acquisition company transactions, conflicts of interest in certain securitizations, and others – and division priorities. Deputy Director Cicely LaMothe enumerated three primary disclosure initiatives in the year ahead: incorporating new rulemaking into disclosure review, proactively addressing emerging issues, and strategically engaging with stakeholders.
Throughout panel discussions, division staff also highlighted disclosure priorities and emerging risks in 2024, referencing market disruptions in banking – including interest rate risk, liquidity risk, and the continued impacts of inflation – as well as AI, exposure and changes in the commercial real estate market, accounting matters requiring the use of judgment, and the implementation of recent SEC rules.
Observing rising rates of AI-related disclosures by large accelerated filers, staff urged registrants to consider specific facts and circumstances when disclosing the use and development of AI and material AI-related risk. Registrants also should critically consider their basis for AI claims when discussing related opportunities and risks, as well as the nature and extent of the board of directors’ role in AI oversight.
In light of continued challenges in the commercial real estate market, staff noted that the division will, when applicable, expect more detailed and granular disclosures to address these risks – for example, disaggregation of loan portfolio by relevant risk characteristics, greater granularity in disclosing metrics such as loan-to-value and occupancy rates, and more detailed discussion of policies, procedures, and other steps taken by management to manage portfolio risk.
