Hopes rising on new SEC chief’s agenda

Updated with correction

Institutional investors and ESG activists are optimistic that new SEC Chairman Gary Gensler will tackle a long-standing to-do list, from market structure to climate risk to proxy voting, and may even undo some of his predecessor's actions perceived to favor companies over investors.

"Chairman Gensler can hit the ground running by finalizing some of the SEC's low-hanging fruit — proposed reforms that are not politically contentious but have languished for years," said Amy Borrus, executive director of the Council of Institutional Investors in Washington, whose members include more than 135 public pension funds, corporate and labor funds, and foundations and endowments with a combined $4 trillion in assets.

"These include universal proxies in contested elections for board seats; improvements to rules allowing company executives to sell stock at a predetermined time; minimum standards for clawbacks of unearned executive compensation; and automatic confirmation that proxy votes investors cast are counted accurately,'' Ms. Borrus said. "CII and many of our investor members have pressed for years for the SEC to adopt these modest but important protections. We hope Chairman Gensler can put them over the finish line."

People familiar with Mr. Gensler's tenure as chairman of the Commodity Futures Trading Commission, where he earned high marks for completing formidable rule-making demands imposed by the Dodd-Frank Act, see reason for that optimism. "I do think that he is a proven reformer. He knows how to get things done, and he doesn't owe anything to anybody," said John Ramsay, chief market policy officer for low-cost exchange IEX Group Inc. in New York. "For all the issues the SEC is confronting now, I think he is the right person at the moment," said Mr. Ramsay, who served at the SEC while Mr. Gensler was at the CFTC.

Mr. Gensler previewed some of his priorities — and willingness to take on controversial subjects — at his Senate confirmation hearing March 2, where ESG issues came up often.

On requiring companies to disclose climate risk, he said it was important to investors but companies also would benefit from it.

On the growing push for disclosure of companies' political activity and related spending, Mr. Gensler said it would boil down to what is material to investors and what will hold up in economic analysis.

On the equally ascending topic of diversity, Mr. Gensler said he would consider Nasdaq's board-diversity proposal to have companies with new listings publicly disclose and increase the diversity of their boards. A decision on approving the proposal is expected by August. Mr. Gensler also supports expanding human capital disclosure requirements.

The ESG lens also will be turned on investment advisers and managers, said Karen Barr, president and CEO of the Investment Adviser Association in Washington representing those firms.

Mr. Gensler "has already signaled he is going to be looking at disclosures, and making sure investment advisers and investment managers are doing what they say they are going to be doing," when it comes to ESG, she said. "The language around ESG is not uniform. They have the authority to take a lot of action by rule-making. This is going to be a very high priority for the SEC," Ms. Barr said.

In April, the SEC took the unusual step of issuing a risk alert that their examiners are seeing unsubstantiated and "potentially misleading" statements and questionable processes from some investment advisers, investment companies and private funds offering ESG products and services. That, plus a lack of standardized ESG definitions, "present certain risks," the alert said.

Other recent SEC actions on ESG include a request for public input on climate risk disclosure, a division of corporation finance review of climate-related disclosure in public filings, more focus on climate-related risk by the division of examinations, creation of a climate and ESG task force in the division of enforcement, and an investor bulletin on ESG funds.

Julien Bourgeois, a partner in the Washington office of Dechert LLP focusing on the asset management industry, sees the enforcement task force as "a pretty logical consequence of what they were doing on the exam front. It was not a surprise," he said.

He does not recall any past risk alerts related to investment strategies. "At this point, we have more coming out of enforcement and exams than the rule-making side. Behind the scenes they've been extremely active. They are laying the foundation for defining what greenwashing is. I would not be surprised if we were to see enforcement actions around ESG investing in the very near future," Mr. Bourgeois said.

Given Mr. Gensler's regulatory background and expertise in blockchain and cryptocurrency — a first for an SEC chairman — and his role on the Financial Stability Oversight Council, a renewed focus on systemic risk within the asset management industry is also a possibility, he said.

Ms. Barr of IAA also sees advancement on diversity within asset managers and advisers. "We are hoping it gets the attention it deserves. Our industry needs to get better," Ms. Barr said. "I hear enthusiasm for change and commitment to change. I feel like our industry understands that progress needs to be made."

For equity markets, the most pressing issues for institutional investors include off-exchange trading, a jump in retail trading dramatized by frenzied trading in GameStop Corp. shares that also highlighted concerns over uneven order routing.

SEC rules aimed at modernizing market data infrastructure and expanding public access were challenged in court by U.S. stock exchanges within months of their December debut. While that is one of several ongoing legal battles between the agency and exchanges, the SEC is expected to be more critical of exchanges' requests for fee increases, at a minimum, sources said. Exchanges managed to stop a fee pilot study in courts, but fees are still being scrutinized, Commissioner Allison Herren Lee said.

"Part of it is going to be better enforcement of best-execution rules, and may just mean updating them. They could do a lot through enforcement," said Tyler Gellasch, executive director of Healthy Markets Association in Washington, a market structure watchdog group whose members include many pension funds. "That will be a real bellwether of whether he is willing to take it on. I think he is," Mr. Gellasch said, before adding, "I think we're years away from market data ever being fixed."

And then there is GameStop. The high-volume retail trading in GameStop and other meme stocks in January has both Mr. Gensler and congressional overseers poised to revisit rules on short-sale disclosure and order execution practices highlighted by the volatile trading.

A memo from the Democratic-led House Financial Services Committee released before a GameStop hearing questioned whether technology and social media have outpaced regulation, exposing investors and markets to unnecessary risks. It also noted that the SEC was directed by the 2010 Dodd-Frank law to require short-sale data disclosure but has not done so.

"Recent events have shown they are extraordinarily relevant today," Mr. Gellasch said. "Fund-holding disclosures clearly should be updated. Large pension funds care for a couple reasons: they want to make sure the market doesn't fold up, and they want to know who the other large holders are."

An unprecedented surge in the creation of special purpose acquisition companies and the potential risk for investors prompted the SEC in April to issue another unusual warning. Creating SPACs and taking them public may protect backers from investor lawsuits but does not take away enforcement options for the SEC, where officials promise to scrutinize SPACs and consider further steps to treat the de-SPAC transaction more like an IPO. In the meantime, the SEC said, investors should be aware of what they are getting into.

Mr. Ramsay of IEX thinks that at Mr. Gensler's SEC, "institutional investors have growing influence. I think the voice of the investor will be heard."