Too much, too quickly from the SEC
Judging by the first quarter, Washington’s policymaking center of gravity in 2022 may be the Securities and Exchange Commission (SEC), which issued 16 proposed rules in the first three months of the year. Only once in the 21st century has the SEC produced more first-quarter rules: 17 in 2011, driven by the Dodd-Frank Act following the global financial crisis.
Some proposals address areas in need of immediate action, but many others not necessarily so. Worse, the SEC has broken with precedent by giving the public fewer than 60 days to provide comments and cost-benefit analysis on most new rules. Rushing through multiple proposals simultaneously, without understanding their cumulative effect, increases the possibility of perverse outcomes. This is problematic enough in benign periods; amid persistent inflation, rising interest rates and geopolitical uncertainty, it is potentially risky to well-functioning capital markets.
The U.S. capital markets are critical for helping companies fund innovation and job creation; enabling governments to fund infrastructure and essential services; supporting the beneficiaries of pension funds; maintaining a steady flow of mortgage financing; and allowing all Americans to grow their retirement, educational and personal savings.
The capital markets are also among the most regulated sectors of our economy. As the primary regulator, the SEC’s mission is threefold: to protect investors, facilitate capital formation, and maintain the fair, orderly and efficient markets on which the first two elements depend. This work is too important to rush and not to get right.
According to Bloomberg, the SEC is “laying out one of the most ambitious agendas in [its] 87-year history.” Last fall, the SEC released its list of upcoming new rules with 54 separate items. And in just the past five months, the SEC issued 24 proposals making an array of changes to complicated securities laws and complex financial markets. Just 12 such proposals total roughly 3,500 pages of text and ask 2,200 separate questions.
The organization at which I have the privilege to serve as CEO supports the policy goals behind several of these rules, including shortening the settlement cycle, updating electronic record keeping, and enhancing disclosure of material climate risks. We believe that others are bad policy, unworkable as proposed or diverting resources away from more time-sensitive priorities, such as finalizing pending rules addressing digital assets and protection of customer data collected by the SEC’s Consolidated Audit Trail.
In all cases, we have been — and will remain — highly engaged in the rule-making process, submitting substantive, constructive comment letters. But we are limited in our ability to conduct a robust analysis and provide meaningful feedback by the SEC’s shortened comment periods.
Federal guidance states the public should have at least 60 days to comment on a rule after its publication in the Federal Register. For particularly complex rule-makings, the public commonly should have 90 days to comment. But of the SEC’s comment periods under the current Chair Gary Gensler, 37 percent have been 30 days, 11 percent have been 45 days, those between 30 and 60 days have been an average of 41 days, 7 percent have been 60 days, and none have been 90 days. By contrast, of the new rule-makings proposed by prior SEC Chairs Mary Jo White and Jay Clayton, 82 percent and 76 percent had 60-day comment periods, while 14 percent and 9 percent, respectively, had 90-day comment periods.
Allowing adequate time for the public to provide input on proposed rules is essential for the SEC to fulfill its mission. Staff have limited resources and expertise in conducting the cost-benefit analysis for each rule, and therefore depend on the work submitted by the public during the comment period. For instance, in its recent climate disclosure proposal, the SEC stated, “In many cases […] we are unable to reliably quantify [the] potential benefits and costs” of the rule and therefore “encourage commenters to provide us with relevant data or empirical evidence […] that would allow us to” do so.
This demonstrates the extent to which the SEC relies on data and other analytical input from the public, especially those with the technical expertise to forecast the consequences of a rule, point out what problems may emerge, and propose better solutions. But by rushing the process and curtailing the comment periods well below the historical precedent, the SEC is shortchanging the regulatory process. This limits the quantity and quality of public input and reduces the SEC’s ability to consider the cost-benefit analysis of each rule, let alone the aggregate effect of all the new rules and their potential interconnections.
Rushing through multiple expansive new rules simultaneously has the potential to materially impact issuers, investors, intermediaries and overall market structure with unpredictable consequences. This could make it harder and more expensive for everyone to access the financing they need, and could have an adverse impact on the real economy in terms of output, employment, wages and prices, which would only compound the economic challenges and uncertainty we’re currently facing.
Last week, I joined 24 others in sending a letter to Chair Gensler calling for the SEC to allow the public more time to review and provide feedback on its new rule proposals. This would be an important step, but more broadly the SEC should streamline its approach to focus on supporting market resilience and efficiency and consider the totality of its agenda. The American economy relies on well-functioning, liquid and efficient capital markets — now is not the time to overload the system with too much, too quickly.
Kenneth E. Bentsen, Jr. is president and chief executive officer of the Securities Industry and Financial Markets Association (SIFMA) and chair of the International Council of Securities Associations (ICSA).