The SEC is pursuing disclosure-related rulemakings on climate, cyber and more in the year ahead.
The SEC’s Strategic Plan for Fiscal Years 2022-2026 emphasizes the importance of registrants making full and fair disclosures to investors on an ongoing basis. Disclosure-related rulemakings are a key way the Commission pursues this goal. Expected actions for 2023 include:
Rulemakings focused on promoting consistent, comparable climate-related disclosures
A final rule is widely anticipated on the SEC’s March 2022 proposal on public company climate-related disclosures. It is intended to enhance and standardize disclosures from public companies about climate-related risks, targets and goals, and greenhouse gas (GHG) emissions. It also would require registrants to quantify the effects of certain climate-related events and transition activities in their audited financial statements and adhere to climate-specific governance requirements. The proposal generated extensive public input from stakeholders ranging from Congress to investor groups, the business community and academics. Much of the public commentary on the proposal has indicated that there is notable support for some mandatory climate-related disclosures. However, there is a broad range of perspectives on specific elements of the proposal. Republican Commissioners Hester Peirce and Mark Uyeda have voiced concerns about it, including that it is overly prescriptive and would require disclosure of immaterial information. They also have challenged whether the proposal would provide benefits such as comparable, consistent and reliable disclosures. The rule is expected to be finalized by April 2023; once issued, it is likely to face court challenges based on statements made by various stakeholder groups. In the meantime, the SEC’s staff is expected to continue monitoring issuers’ climate-related disclosures and has expressed the expectation that issuers consider the Commission’s published guidance regarding climate change-related disclosures.
Adoption of cybersecurity risk governance disclosure rule
The SEC’s March 2022 rule proposal on public company disclosures relating to cybersecurity risk governance would require current reporting from registrants about material cyber incidents and periodic disclosures regarding a company’s policies and procedures — as well as management’s role and expertise — for identifying and managing cybersecurity risks. The proposal also would require issuers to disclose information about their board oversight of cybersecurity risks. The SEC has suggested it will finalize this rule by April 2023, and in the meantime continues to remind issuers to refer to the Commission’s published guidance on public company cybersecurity disclosures.
Adoption of disclosure proposal for share repurchase modernization
In December 2022, the SEC reopened the comment period for the 2021 proposal on share repurchases reporting and disclosures to allow for additional input in light of the potential economic impact of the Inflation Reduction Act of 2022 on share repurchases. The proposal would require more timely disclosure regarding purchases of equity securities for each day that an issuer, or an affiliated purchaser, makes a share repurchase, as well as periodic reports on the rationale for the repurchases. These disclosures would be provided on a new Form SR. The SEC suggests it will consider a final rule on this proposal sometime in 2023.
Adoption of special purpose acquisition company–related disclosure rule
The SEC suggests it will also act on a final rule on disclosures related to special purpose acquisition companies (SPACs) by April 2023, which would require new disclosures when a SPAC conducts an IPO and when it combines with a private operating company in what is known as a de-SPAC transaction, among other changes. When the rule proposal was released in March 2022, Gensler stated that SPACs function as alternative IPOs and that the proposal is intended to provide the same investor protections that are available for a traditional IPO.
Release of human capital–related rule proposals
The SEC has communicated plans to propose disclosure rules relating to human capital in the year ahead, including a human capital management disclosure proposal that the SEC suggests it will consider by April 2023, and a corporate board diversity disclosure proposal on the SEC’s regulatory agenda for consideration by October 2023. Gensler has been a proponent of human capital disclosures throughout his tenure, and Democratic Commissioner Jaime Lizárraga also has championed diversity, equity and inclusion — noting that human capital disclosures provide an opportunity for investors to benefit from meaningful insights on diversity.
Dodd-Frank Act disclosure rulemaking
In 2022, the Commission finalized a 2010 Dodd-Frank Act (DFA) rule on erroneously awarded compensation (also known as clawbacks), as well as a “pay versus performance” disclosure rule. More DFA rulemakings are on the SEC’s 2023 agenda. This includes a proposal to amend a rule, which took effect in March 2021, on resource extraction disclosures; the rule requires resource extraction issuers to make annual disclosures about payments to foreign governments or the US federal government for the commercial development of oil, natural gas or minerals. It is not clear what changes to the rule are under consideration.
SEC rulemaking activity relating to the proxy process continues to drive discourse.
Several aspects of the SEC’s recent proxy-related rulemaking activity remain controversial, such as the SEC’s 2022 amendments to its proxy voting advice rule, which received strong support from many investors and strong opposition from within the business community. Expected action for 2023 includes:
Consideration of final rule to amend shareholder proposal process
The SEC plans to consider final amendments to Exchange Act Rule 14a-8, which generally requires companies to include shareholder proposals in their proxy statements absent a basis for exclusion. The proposed amendments would clarify and narrow certain of the substantive bases within the rule that permit the exclusion of shareholder proposals in proxy statements. Similar to the reaction provoked by the proxy voting advice rule mentioned above, the proposed amendments resulted in divergent views between the investor and issuer communities.
Regulation of crypto assets
The SEC’s role in overseeing crypto assets was a hot topic in 2022 and will remain so in 2023.
Gensler maintains the view that most crypto assets are securities and should be registered with the SEC under existing rules and follow securities laws and regulations. Beyond registering crypto assets that are securities, he has emphasized the need for companies in the crypto asset space — including, for example, those that act as trading platforms for crypto assets — to come into compliance with all securities laws and regulations.
Republican Commissioners Hester Peirce and Mark Uyeda have been vocal about their different views on the agency’s approach to crypto asset regulation. Uyeda has questioned the SEC’s decision to omit crypto asset regulation from its agenda, highlighting uncertainty about which crypto assets are securities. Peirce has expressed similar sentiments and stated that providing regulatory guidance only through enforcement takes too long and can produce inconsistent outcomes, to the detriment of “good-faith crypto actors.”
The main area of SEC activity on crypto assets in 2022 was in the enforcement arena, and this focus will likely continue this year through the following action:
Continued scrutiny of the crypto asset industry and related disclosures, but minimal rulemaking activity
The SEC has demonstrated that it will continue to take enforcement action relating to the crypto asset market participants. To date, the SEC has not included any crypto asset-focused rulemakings on its regulatory agenda. The SEC did, however, propose a rule in February 2023 that would address crypto assets for the first time. The proposal would expand investment advisers’ responsibilities to safeguard customer assets to include crypto assets; currently, these responsibilities apply only to funds and securities. The Division of Corporation Finance is also expected to review disclosures by companies relating to the direct or indirect impact of events or conditions in the crypto industry on their businesses. In December 2022, the division posted a sample comment letter on the SEC’s website outlining topics that companies should consider when drafting disclosures in periodic reports.
Gensler and SEC Enforcement Director Gurbir Grewal have both expressed a strong commitment to a tough enforcement approach.
The SEC has indicated that in FY 2022, the Commission filed a total of 760 enforcement actions — a 9% increase from the prior year. In addition, over $6 billion in monetary relief was ordered by the SEC last year, including civil penalties and disgorgement — the most in SEC history. In FY22, the SEC issued approximately $229 million in 103 awards through its whistle-blower program, the second highest year for the SEC in terms of the dollar amount and number of rewards.
Gensler has discussed five principles that continue to guide the Division of Enforcement in its enforcement approach: consider economic realities, promote accountability, pursue high-impact cases, focus on the timeliness of enforcement matters and emphasize the role of gatekeepers as the first line of defense. Expected action for 2023 includes:
Continued focus on enforcement, particularly on cybersecurity; environmental, social and governance; and crypto assets
The SEC brought significant enforcement actions in 2022 that highlighted cybersecurity failures by firms regarding record-keeping and safeguarding customer information. The SEC has also recently taken crypto asset–related enforcement action on matters involving failure to register offers and sales of crypto lending products, fraudulent crypto pyramid and Ponzi schemes, and insider trading. Recent high-profile failures in the crypto industry will likely lead to a continued focus by the SEC. Regarding environmental, social and governance (ESG) matters, in 2022 the SEC pursued cases in which companies were charged with making false or misleading claims concerning environmental disclosures, and it is expected to continue scrutinizing market participants’ claims around ESG matters to ensure that investors are receiving accurate information.
Other areas to monitor
The SEC also may focus on compliance with the HFCAA and increased transparency relating to private entities.
Ongoing monitoring by the SEC and Public Company Accounting Oversight Board to ensure compliance with the HFCAA
The HFCAA requires the SEC to block non-US companies from trading in US markets if their auditors cannot be inspected or investigated completely by the Public Company Accounting Oversight Board (PCAOB) for a defined period of time because of legal restrictions in their home jurisdiction. In 2022, the PCAOB and Chinese authorities announced an agreement that allowed PCAOB staff to conduct inspections and investigations of mainland Chinese and Hong Kong PCAOB-registered firms for the first time since the HFCAA was enacted in December 2020. After carrying out inspections, the PCAOB determined that it had full access to the mainland Chinese and Hong Kong firms registered with it, meaning that, under the HFCAA, the companies audited by these firms were no longer in danger of being banned from US trading as long as this level of access continues. The SEC and PCAOB have both announced plans to monitor compliance with the HFCAA. In addition, at the end of 2022, Congress modified the HFCAA so that foreign companies will be banned from US trading if their auditors cannot be inspected or investigated by the PCAOB for two years, shortening it from the three-year period originally granted by the HFCAA.
Focus on private entities (including funds and companies)
Gensler has raised concerns about the lack of transparency in private capital markets during his SEC tenure, and Democratic Commissioner Caroline Crenshaw also has expressed concerns about the broad availability of exemptions from SEC registration for large private issuers. The Commission has several private entity–focused rulemakings on its 2023 agenda. This includes a final rule by April that would require private fund advisors to provide investors with quarterly statements detailing information about private fund performance, fees and expenses, and another rule is scheduled for consideration for April 2023 that would require new current reporting by large hedge fund advisors and advisors to private equity funds of events that cause significant stress. The Commission also plans to propose two rules regarding qualification for exemptions from registration, which could impact whether companies can qualify for exemptions from registration with the SEC.
SEC activity will remain high in 2023 with a robust agenda on a variety of issues for public and private companies alike. The months ahead are expected to bring substantial rule changes, including on cybersecurity and climate disclosures, new rule proposals and other actions that could significantly shift regulatory requirements for issuers. Additionally, the SEC’s robust enforcement approach is expected to continue, focusing on heightened accountability and high-impact cases.