In remarks yesterday at London City Week, SEC Chair Gary Gensler elaborated a bit on the bare bones of some of the almost 50 items on the Reg-Flex Agenda that was made public earlier this month. (See this PubCo post.) In Gensler's view, disclosure protects investors by helping them invest in "companies that fit their investing needs," helps companies by facilitating capital formation and benefits markets by helping to keep them fair, orderly and efficient-all core responsibilities within the remit of the SEC.
In the area of public company disclosure, Gensler noted that he had asked the staff for recommendations on mandatory company disclosures on climate risk and on human capital. With regard to climate, he observed that investors representing "tens of trillions of dollars of assets under management are looking for consistent, comparable, decision-useful information to determine whether to invest, sell, or make a proxy vote one way or another." In particular, he has asked the staff for recommendations about "governance, strategy, and risk management related to climate risk." In addition, we can apparently also expect to see requirements for disclosure of specific metrics, such as greenhouse gas emissions, that are most relevant to investors. Another area of potential focus may be disclosure regarding forward-looking climate commitments that companies have made or specific climate targets that are imposed by some jurisdictions where companies may have significant operations.
Gensler has also asked the staff for recommendations on human capital disclosure. In particular, he noted that these might include specific "metrics, such as workforce turnover, skills and development training, compensation, benefits, workforce demographics including diversity, and health and safety."
In addition, he advocated updating the "transparency regime," including potentially accelerating the deadline for 13D beneficial ownership disclosure. That deadline, he said, hasn't been updated in over 50 years: "Those rules might've been appropriate for the 1970s, but I have my doubts about whether they continue to make sense given the rapidity of current markets and technologies. I've asked staff how we might update these rules, including possibly shortening reporting deadlines." Other areas he has asked the staff to explore are requiring more information about short sales, security-based swaps and stock buybacks, with the goal of minimizing information asymmetry.
With regard to market structure, he has asked the staff to take a broad look at updating rules, taking into account current technologies and business models in the equity markets. Does the current equity market structure best promote efficiency and competition? Another issue is payment for order flow, which is increasing in the U.S., but prohibited in the U.K. and elsewhere. To Gensler, "it all comes down to how we best promote efficiency and maintain resilient markets in light of new business models and technologies."
SideBar
Gensler has previously identified two types of payments for order flow, both of which "raise questions about whether investors are getting best execution." Payment for order flow for retail trades has received most of the attention, but there are also "rebates," payments for order flow from exchanges to market makers and to brokers. Of course, brokers with these arrangements receive more payments for higher trading volume. What's relatively new are zero-commission brokerages, which Gensler suggested, may not be as free as they appear to investors. According to Gensler, "payment for order flow raises a number of important questions. Do broker-dealers have inherent conflicts of interest? If so, are customers getting best execution in the context of that conflict?" For example, he suggested, is there a tradeoff between payment for order flow and price improvement for customers, with the result that customers bear the costs of "inferior executions?" It's "best execution," he observed, "not just better execution." In addition, he asked whether broker-dealers may be "incentivized to encourage customers to trade more frequently than is in those customers' best interest?" Some countries, he noted, prohibit broker-dealers from sending retail orders to wholesalers in exchange for payments. (See this PubCo post.)
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