SEC Chair Gary Gensler signals that disclosure will be a key issue in the year ahead

The annual two-day “SEC Speaks” event kicked off Tuesday, offering clues about the Securities and Exchange Commission’s priorities for the year ahead.

Sponsored by the Practicing Law Institute, this is a forum where the SEC provides advice to the legal community on rules, regulations, enforcement actions and lawsuits. The event allows the SEC to get its main messages across, and this year the key issue is “disclosure.”

“(We) have an obligation to update the rules of the road, always with the goal of promoting confidence as well as efficiency, competition and liquidity in the markets,” the SEC chairman said, Gary Gensler, in his introduction to the conference. In addition to Gensler, all SEC division heads and senior executives will speak.

Based on Gensler’s introductory remarks, discussions will take place on the next step to shorten the securities settlement cycle from two days to one (T+1, which takes place on May 28), on expanding the definition of an exchange to include more recent transactions. electronic trading platforms (such as request for quote or RFQ electronic trading platforms), consideration of a change in the current one cent increment for quoting stock transactions to levels below one penny, creating a best execution standard for brokers, and creating greater competition for orders from individual investors (so-called payment for order flow).

SEC officials are often heard saying that the role of the SEC is to “protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.”

This seems like a fairly broad mandate, and indeed it is. Deliberately. It was born out of the disaster of the stock market crash of 1929, which was the first event of the greatest economic catastrophe of the last 100 years: the Great Depression.

Before 1933, and especially in the 1920s, all kinds of securities were sold to the public with wild claims, most of which were fraudulent. After the crash of 1929, Congress began searching for a cause, and fraudulent claims and lack of disclosure were at the top of the list.

Congress then passed the Securities Act of 1933, and the following year, the Securities Exchange Act of 1934, which created the SEC to enforce all new laws. It also required everyone involved in the securities industry (primarily brokerage firms and exchanges) to register with the SEC.

The 1933 law did not prohibit the sale of a bad investment. It simply required disclosure: all relevant facts about an investment were supposed to be disclosed and investors could form their own opinion.

The 1933 Act was the first major federal legislation to regulate the offer and sale of securities in the United States. This was followed by the Investment Company Act of 1940, which regulated mutual funds (and eventually ETFs), and the Investment Advisers Act of 1940, which required investment advisers to register with the DRY.

Tuesday’s conference is a chance for Gensler and his team to tell everyone what they do in more detail. The agency has six divisions, but these can be boiled down to disclosure, risk monitoring and enforcement.

Risk monitoring. To fulfill its mandate of protecting investors, it is essential to understand what the risks are for investors. There is an economic analysis and risk analysis division that does this.

Disclosure. Disclosure is the heart of the whole game. It is the original requirement of the 1933 law. The SEC has a division of corporate finance responsible for ensuring that Corporate America provides information on matters likely to be disclosed. significantly affect businesses. It starts with an IPO and continues when the company becomes publicly traded.

There is also an examination division which manages the SEC’s national examination program. This is exactly what it sounds like. The SEC identifies areas of high concern (cybersecurity, crypto, money laundering, climate change, etc.) and then monitors U.S. companies (investment advisors, investment firms, broker-dealers, etc.) to ensure they comply with all required disclosures. Current hot topics include climate change, cryptography and cybersecurity.

The problem is that the definition of what must be disclosed has evolved over the decades. For example, a bitter legal battle is brewing over the recent enactment of regulations requiring companies to disclose climate risks. Many argue that this was not part of the SEC’s original mandate. The SEC disagrees, arguing that it is part of its mandate to “protect investors.”

Enforcement. The SEC can use the information it collects to make policy recommendations, and if it believes a company is not in compliance, it can also refer it to the dreaded enforcement division.

It’s the cops. They investigate violations of the securities laws and bring civil lawsuits in federal courts. This division will take stock of the litigation in which the SEC is involved, and which is increasing.

Mutual Funds, ETFs and Investment Advisors. We will also hear from the division that oversees mutual funds and investment advisors. Most people invest in the markets through an investment advisor and typically purchase mutual funds or ETFs. All of this is governed by the Investment Company Act of 1940 and the Investment Advisers Act of 1940. There is an investment management division which oversees all investment companies (which include mutual funds, market funds money market, closed-end funds and ETFs) and investment advisors. This division will share its views on some of the new disclosure requirements adopted over the past two years, particularly the rules adopted in August 2023 for private fund advisors.

Trade. Finally, the trading and markets division monitors everyone involved in trading: brokers, exchanges, clearing agencies, etc. Updates to recordkeeping requirements can be expected, shortening the trading cycle (US moving to one-day settlement). of a three-day settlement on May 28, which is a big deal), and the disclosure of short sales.

Donald Trump likely won’t attend the conference, but the SEC significantly tightened rules in January regarding disclosure for special purpose acquisition companies, or SPACs. Trump’s company, Truth Social, went public on March 22 through a merger with a SPAC known as Digital World Acquisition Corp. Trump Media and Technology (DJT)and he made revelations Monday that sent the stock down about 22%.

Before the recent rule changes, executives marketing a company to be acquired by a SPAC often made wild claims about the future profitability of those companies – claims that would never have been possible if a traditional initial public offering route had been used. The new SPAC rules adopted by the SEC made the target company legally responsible for any statements made about future results by taking responsibility for the disclosures.

In addition, companies benefit from “safe harbor” protection when making forward-looking statements, which gives them protection from certain legal liabilities. However, IPOs do not benefit from this “safe harbor” protection, so forward-looking statements contained in an IPO registration are generally made very cautiously.

The rules clarify that SPACs also do not have “safe harbor” legal protections for forward-looking statements, meaning the companies could more easily be sued.

As I said, Trump probably won’t come to the conference, but the message: “Disclosure!” » will probably be the dominant refrain.