During the fourth quarter of 2023, 15 stories were written that involved legal prosecution or settlements, and an additional 69 stories on legislation and regulation.
• Sens. Mark Warner and John Kennedy introduced the Financial Artificial Intelligence Risk Reduction Act in response to Al manipulation of financial markets. The bill requires the Financial Stability Oversight Council and financial regulators to address “deepfakes” issues, produce reports or recommendations that fill regulatory gaps and hold Al deployers accountable by modernizing the “intent standard.”
• House Judiciary Committee Chair Jim Jordan subpoenaed BlackRock and State Street Global Advisors to investigate if their ESG investing policies violate U.S. antitrust laws after inadequate responses were submitted by both. BlackRock claimed that more than 7,700 documents and 91,000 pages had been produced and a subpoena wasn’t necessary. Vanguard Group and Arjuna Capital were also in the same investigation.
• The House and Senate Armed Services Committee was asked by Representative Patrick McHenry and six Republican subcommittee chairs to drop a provision in the National Defense Authorization Act that would require companies to notify U.S. government of certain investments in Chinese technology sectors including Al, advanced semiconductors and microelectronics.
• The Financial Stability Oversight Council finalized a new guidance that allows it to determine if a nonbank is a systemically important financial institution to be supervised by Federal Reserve. The Analytic Framework monitors a broad range of asset classes and institutions to mitigate marketwide systemic risk. Major vulnerabilities that can lead to financial instability include leverage, liquidity risk, maturity mismatch and concentration. Moving away from an activity-based approach, a new preliminary analysis will be conducted based on both quantitative and qualitative metrics, including their readiness to respond to decarbonization and climate transitions, and an official designation requires a two-thirds vote from FSOC’s 10 voting members.
• The SEC is moving to finalize two rules that would expand entities required to register as dealers. Top Republicans from the Senate Banking Committee urged SEC Chair Gary Gensler to rescind two rule proposals issued in March 2022. The proposals require market participants who assume dealer capacity and engage in certain level of government security transactions to be registered with the SEC. The new process for identifying such participants includes qualitative and quantitative standards. If a market participant’s actions are “as part of a regular business,” private fund managers that naturally require additional regulatory framework (if registered as SEC dealers), then expanding dealer definition would lead to new amendments made to currently incomplete regulations or the introduction of new rules imposed on private fund managers. Senators commented that the bills lack complete economic analysis and credit conditions will be tightened as a result of it. Compliance burdens and costs might cause participants not to register as an SEC dealer but exit the Treasury market entirely, which would lead to inefficient pricing, a decline in U.S. Treasury market liquidity and a wider bid-ask spread.
• The 5th U.S. Circuit Court of Appeals determined that the SEC failed to conduct a proper cost-benefit analysis and violated the Administrative Procedure Act when drafting rules that govern companies’ timely disclosures on stock buybacks, either on a quarterly or semiannually basis. The defendant argued that stock buybacks are important to grow business and return value, and companies should make decisions free from government’s micromanagement. However, the court sided with the SEC and dismissed most of the remaining claims.
• The SEC proposed a rule to prevent stock exchanges from offering volume-based transaction pricing when executing trades as it will create an unlevel playing field for smaller broker-dealers. Exchanges that offer lower fees or higher rebates based on the number of shares need to disclose and submit such information to the SEC monthly.
• After Elon Musk acquired a stake of 9.2% of X (Twitter) in March 2022 and failed to disclose the trade properly, he completed a $44 billion purchase in October 2022. The SEC served him a subpoena for violating federal securities law, he refused to appear in court and a federal judge in December ruled that Elon Musk must testify again in court.
• A BlackRock subsidiary agreed to a cease-and-desist order and agreed to pay a $2.5 million penalty to settle SEC charges. Between October 2015 to October 2019, Aviron Group, a print or advertising-related firm, the largest single investment in BlackRock Multi-Sector Income Trust, was incorrectly labeled as “diversified financial services” company and its couple rate was inaccurately reflected.
• The U.K.’s Financial Conduct Authority finalized anti-greenwashing rules to improve sustainability disclosure requirement, which includes a new labeling rule that adds the fourth category “sustainability mixed goals” to cover multiasset and blended strategies. Starting in December 2024, asset managers will have to choose one of the four specific fund labels (sustainable focus, sustainable improvers and sustainable impact) and indicate that it applies to 70% or more of the assets.
• Laura Trott left her position at the U.K.’s minister for pensions and was appointed as chief secretary to the Treasury.