U.S. Securities and Exchange Commission Chairman Gary Gensler testifies during a Senate Banking Committee hearing on Capitol Hill on September 12, 2023 in Washington, DC.
Drew Angler | Getty Images
The annual two-day “SEC Speaks” event kicked off on Tuesday, providing clues to the Securities and Exchange Commission’s priorities for the coming year.
Sponsored by the Practicing Law Institute, the forum is the SEC’s forum for providing guidance to the legal community on rules, regulations, enforcement actions and litigation. The event allows the SEC to convey its key messages, and a key issue this year is “disclosure.”
SEC Chairman Gary Gensler said in an introduction to the meeting: “We have an obligation to update the rules of the road, always with an eye toward promoting trust and efficiency, competition and liquidity in the market.” In addition to Gensler, all SEC department heads and senior staff will give a speech.
According to Gensler’s introductory remarks, upcoming initiatives will be discussed to shorten the securities settlement cycle from two days to one day (T+1, which occurs on May 28) and expand the definition of exchange to include more near-term trading platforms ( (such as requests for quotes or RFQs, electronic trading platforms), consider changing one-penny increments of current stock trading quotes to sub-penny levels, create best execution standards for broker-dealers, and create more competition for orders from individual investors (So-called order flow payment).
SEC Mission
You often hear SEC officials say that the SEC’s role is to “protect investors, maintain fair, orderly, and efficient markets, and promote capital formation.”
This sounds like a pretty extensive task, and it is. Deliberately so. It grew out of the disaster of the 1929 stock market crash, the initial event of the greatest economic disaster of the past 100 years: the Great Depression.
Before 1933, and especially during the 1920s, various securities were sold to the public with wild claims, most of which were fraudulent. After the crash of 1929, Congress began searching for causes, with fraudulent claims and lack of disclosure at the top of the list.
Congress then passed the Securities Act of 1933 and the following year passed the Securities Exchange Act of 1934, which created the SEC to enforce all new laws. It also requires everyone involved in the securities business (mainly brokerage firms and stock exchanges) to register with the SEC.
The 1933 Act did not make it illegal to sell distressed investments. It simply requires disclosure: all relevant facts about the investment should be disclosed and investors can make their own decisions.
The 1933 Act was the first major federal legislation in the United States regulating the offer and sale of securities. 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 SEC.
Already on the agenda
Tuesday’s meeting was an opportunity for Gensler and his staff to walk everyone through what they’re doing. The agency has six departments, but they boil down to information disclosure, risk monitoring and enforcement.
Risk monitoring. In order to fulfill its duty to protect investors, it is critical to understand the risks investors face. There is an Economic and Risk Analysis Department responsible for this work.
Disclosure. The whole game is about disclosure. This was the original requirement of the 1933 Act. The Securities and Exchange Commission has a division of corporate finance that ensures corporate America exposes issues that could have a significant impact on companies. This begins with an IPO and continues when the company is publicly traded.
There is also a testing division responsible for administering the SEC’s national testing program. This is what it sounds like. The SEC identifies areas of high concern (cybersecurity, cryptocurrency, money laundering, climate change, etc.) and then monitors U.S. businesses (investment advisers, investment companies, broker-dealers, etc.) to ensure they comply with all required disclosures. Hot topics right now include climate change, cryptocurrency and cybersecurity.
The problem is that the definition of what should be disclosed has changed over the decades. For example, recently enacted regulations requiring companies to disclose climate risks have sparked a fierce legal battle. Many believe this was not part of the SEC’s original mandate. The U.S. Securities and Exchange Commission disagrees, arguing that this is part of its duty to “protect investors.”
law enforcement. The SEC can use the information they gather to make policy recommendations, or they can refer a company to the feared law enforcement agency if they believe it’s not compliant.
These are the police. They investigate violations of securities laws and file civil lawsuits in federal court. The Division will provide updates on litigation involving the SEC, which is increasing in number.
Mutual funds, ETFs, and investment advisors. We will also hear from the Department of Oversight of Mutual Funds and Investment Advisers. Most people invest in the market through an investment advisor, who usually buys mutual funds or ETFs. This is all governed by the Investment Company Act of 1940 and the Investment Advisers Act of 1940. The Investment Management segment monitors all investment companies (including mutual funds, money market funds, closed-end funds and ETFs) and investment advisers. The Department will share insights into some of the new disclosure requirements enacted over the past few years, particularly the rules adopted in August 2023 for private equity advisers.
trading. Finally, the segmentation of trades and markets monitors everyone involved in a trade: broker-dealers, stock exchanges, clearing houses, etc. We can expect updates to record-keeping requirements, resulting in shorter trading cycles (the US went to one-day settlement and three-day settlement on May 28, which is a big deal), as well as short-selling disclosures.
Did we mention SPACs?
Donald Trump may not be attending the meeting, but the U.S. Securities and Exchange Commission significantly tightened rules on special purpose acquisition company (SPAC) disclosures in January. Trump’s company, Truth Social, went public on March 22 through a merger with a SPAC called Digital World Acquisition Corp.The company currently trades under the symbol Trump Media & Technology (DJT)the company’s disclosure on Monday caused the company’s stock price to fall by approximately 22%.
Before the recent rule changes, executives marketing companies to be acquired by SPACs often made wild claims about the businesses’ future profitability — claims that would have been impossible to achieve using the traditional IPO route. New SPAC rules adopted by the SEC require target companies to be held legally responsible for any statements about future performance through disclosure obligations.
In addition, companies are protected by a “safe harbor” from certain legal liabilities when making forward-looking statements. However, IPOs do not receive this “safe harbor” protection, which is why forward-looking statements in IPO registrations are often very carefully worded.
The rule clarifies that SPACs also do not have a “safe harbor” legal protection for forward-looking statements, meaning the companies may be more susceptible to lawsuits.
Like I said, Trump may not show up to the meeting, but the message: “Disclose!” may be the main refrain.
