House lawmakers criticize SEC's brisk rule-making pace and its climate, AI proposals

House lawmakers criticized the pace of the SEC's rule-making and debated the merits of various agency proposals, including those on climate disclosure and artificial intelligence.

"The SEC has embarked on an extraordinary pace of rule-making since the spring of 2021, a pace that raises questions about the agency's ability to comprehensively evaluate the cumulative effects, indirect costs, and cross-market implications of these rules," Subcommittee Chair Ann Wagner, R-Mo., said in her opening statement on Nov. 2 before the House Financial Services Subcommittee on Capital Markets.

Most of the hearing's witnesses — which included Kenneth E. Bentsen Jr., president and CEO of Securities Industry and Financial Markets Association and Thomas Quaadman, executive vice president of the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness — agreed with Wagner.

However, while acknowledging the SEC's "sweeping regulatory revamp," Amy Borrus, executive director of the Council of Institutional Investors, said, "From CII's perspective, Chair (Gary) Gensler's leadership has greatly advanced the SEC's tripartite mission of protecting investors, maintaining fair, orderly and efficient markets, and capital formation."

Rep. Maxine Waters, D-Calif., who serves as the top Democrat on the House Financial Services Committee, concurred that Gensler has done a "great job" in his role. Waters also asked Borrus if she feels that Gensler's leadership of the SEC has lived up to the "priorities that working families and retirees care about," to which Borrus agreed.

"Many CII members and many, many other market participants believe that climate change is a critical systemic risk that long-term institutional investors must address as part of their fiduciary duty," Borrus said, referring to the SEC's proposed climate disclosure rule, which the agency has yet to finalize.

Originally proposed in March 2022, the rule would require public companies to disclose a host of climate-related information in their periodic reports and registration statements, including greenhouse gas emissions.

At a Chamber of Commerce event last week, Gensler defended the controversial rule proposal, stating it would ultimately help the business community. He reiterated that many companies are disclosing this type of information already, and the rule would bring "some consistency and comparability" to climate disclosures.

"We agree with Chair Gensler that the SEC has a role to play in making sure there's some standardization" to the disclosure of climate-related information, Borrus said in the hearing.

Separately, both subcommittee leaders raised concerns over the SEC's AI proposal, which would require investment advisers and broker-dealers to "eliminate or neutralize" conflicts of interest in investor interactions that use certain technologies, including AI.

Subcommittee chair Wagner raised concerns about the broad scope of the proposal's covered technologies and its impact on small businesses, while the subcommittee's ranking member Brad Sherman, D-Calif., asked about the risks of the proposal impeding on investments.

SIFMA's Bentsen told Sherman that the rule would "impact things like prime brokerage in the institutional market," but it would also "force firms to more or less police their clients, which is really the role of the SEC."

In comment letters to the SEC, SIFMA and several other trade associations have called on the SEC to withdraw the proposal, stating that it would hinder the financial industry's use of technology and harm market participants.

On Oct. 30, President Joe Biden issued an executive order to increase oversight of AI, which includes a mandate for the Secretary of the Treasury to issue a report on best practices for financial firms to manage AI-related cybersecurity risks.