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The SEC’s role in shaping the financial compliance landscape has been both transformative and contentious. Under the stewardship of Commissioner Gary Gensler, the regulator has been particularly proactive, issuing a plethora of rules that touch upon diverse areas ranging from climate-related disclosures to the burgeoning field of cryptocurrencies. Yet, these regulatory initiatives have not been without controversy, underlining the need for a detailed understanding of their impact.
Setting the new rule agenda
The SEC has been particularly busy. Since his appointment in April 2021, Gensler has proposed over 40 rules that span a wide array of issues, from climate-related disclosures to cryptocurrency regulation. This rapid pace has elicited mixed reactions from industry stakeholders, some of whom have expressed concerns about the speed and volume of these regulatory proposals. The SEC’s recent focus on private fund rules and marketing rules has increased compliance burdens for firms. The new rules around performance advertising, for instance, have altered traditional practices and increased the workload for CCOs and compliance teams.
The proposed rules could also significantly impact the fields of investment advisory and brokerage services. These rules aim to adapt financial regulation to technological advancements and changes in market practices, such as outsourcing by registered investment advisers and the use of predictive data analytics.
Additionally, the SEC’s proposal to amend Rule 206(4)-2, commonly known as the “custody rule,” is noteworthy. While the rule aims to enhance investor protection, it’s been met with reservations from industry groups who question the necessity of altering a well-established and effective custody framework without a clear policy rationale.
Ambitious enforcement agenda
Chair Gensler’s tenure at the SEC has been characterized by a robust approach to enforcement, with over 700 actions filed in just one fiscal year. These actions span a wide array of financial misconduct, from scrutinizing crypto lending products to clamping down on electronic communications. The financial penalties levied have been substantial, underscoring the SEC’s commitment to holding violators accountable. However, the case against Virtu Financial serves as a critical reminder that the landscape of global compliance is not black and white. Despite Virtu’s self-disclosure of a compliance issue, the SEC chose to file charges against the firm. This raises questions about the fairness and efficacy of a regulatory system that appears to penalize even those who seek to correct their course.
Looking towards a digital future
The SEC’s recent shift in its approach to cryptocurrencies, applying the Howey Test to digital assets, indicates a more significantly more conservative stance. This change has tangible implications for issuers, investors, and the broader financial ecosystem, impacting the manner in which digital assets are issued, traded and integrated into existing financial infrastructures.
There are some roadblocks however. Two landmark Supreme Court cases, Cochran v. SEC and Lucia v. SEC, have limited the SEC’s expanding regulatory power by limiting the use of ALJ’s. While the SEC’s goal of investor protection is essential, the means by which it achieves these ends must withstand constitutional muster.
Commissioner Gary Gensler’s tenure has been marked by an ambitious regulatory agenda, one that has sought to adapt to technological advancements, changing market practices and emergent forms of financial misconduct. While the SEC’s robust approach to enforcement underscores its commitment to investor protection, it also raises critical questions about the efficacy and fairness of the current regulatory framework.
Industry stakeholders have expressed a gamut of opinions, questioning the pace, volume and even the fairness of these new rules and enforcement actions. Landmark Supreme Court cases like Cochran v. SEC and Lucia v. SEC have further complicated the picture, imposing constitutional limits on the SEC’s expanding regulatory powers. The complexities of this regulatory environment serve as a reminder that nuanced understanding and careful consideration is key to effective governance.