Chair testifies on SEC’s unified rulemaking agenda
On Sept. 14, 2021, SEC Chair Gary Gensler testified before the Senate Committee on Banking, Housing, and Urban Affairs. His testimony focused on current work of SEC staff on areas identified in the most recent SEC rulemaking agenda, including:
- Market structure (treasury, nontreasury fixed-income, equity, security-based swaps, and crypto asset markets)
- Predictive data analytics
- Issuers and issuer disclosure (including climate risk, human capital, cybersecurity, special purpose acquisition companies, China, and 10b5-1 plans)
- Funds and investment management
Chair Gensler concluded his remarks with observations about the SEC’s enforcement and examinations activities.
SEC discusses competition and regulatory reform at the PCAOB
On Sept. 9, 2021, the SEC’s Investor Advisory Committee (IAC) met to discuss various matters including consideration of audit firm competition and regulatory reform at the PCAOB. The discussion of competition and regulatory reform included panelists representing various stakeholders in the financial reporting ecosystem. Panelists debated how audit opinion customers (that is, audit committees) and consumers (that is, investors) receive and use information about audit quality as well as how communication of that information could be changed or improved to meet various stakeholder objectives. The discussion also focused on the PCAOB’s current role in fostering audit quality and how that role might evolve in the ever-changing landscape of stakeholder needs and technology. Jurisdictional differences in audit regulatory regimes also arose as a topic.
The IAC meeting also included a panel discussion of investor protection in light of the behavioral design of certain online trading platforms, and the IAC also voted to provide the SEC with certain recommendations regarding special purpose acquisition companies and Rule 10b5-1 trading plans.
SEC Chair Gensler, Commissioners Hester Peirce and Elad Roisman, and some panelists offered prepared remarks.
Chair remarks on digital engagement practices, crypto assets, and disclosures
On Sept. 1, 2021, Chair Gensler provided remarks on digital engagement practices, crypto assets, and disclosures before the European Parliament Committee on Economic and Monetary Affairs, the financial advisory body of the European Union.
In the evolving area of technology and finance, Gensler discussed the use of predictive data analytics underlying the trading and wealth management apps flooding the market. The apps use individualized marketing and behavioral prompts, which encourage users to engage with a digital platform. These tools are designed to increase platform revenues, data collection, and customer engagement, leading to potential conflicts between the platform and investors. Use of digital enhancements raises questions about investor protection, securities laws implications, and how these tools and models ensure access and pricing fairness. He highlighted the SEC’s request for information and comment on digital engagement practices issued on Aug. 27 and warned of his concern that the broad adoption of deep learning models could contribute to a future crisis.
In his remarks about crypto assets, Gensler reiterated his position that the SEC needs to ensure it is achieving its public policy goals: protecting investors and consumers, guarding against illicit activity, and ensuring financial stability. He noted that most crypto platforms provide direct access for investors with no broker between the public and the platform, which creates vulnerability as these platforms do not have clear obligations to protect investors. Gensler said the use of stablecoins on these platforms might help those looking to avoid many of the public policies – such as anti-money laundering policies – in the traditional banking and financial system.
Lastly, recognizing investors’ increased demand for additional disclosures to understand climate risks, workforces, and cybersecurity risks of the companies they invest in, Gensler shared that he asked the SEC staff to develop a proposal for climate risk disclosure requirements and to examine information that can be learned from other frameworks and standards. He said he directed staff to review current fund branding practices and make recommendations about whether fund managers should disclose the criteria and underlying data they use to market themselves, and to consider disclosure requirements about human capital and board diversity.
SEC announces charges for deficient cybersecurity procedures
On Aug. 30, 2021, the SEC announced the sanctioning of eight firms in three actions for failures in their cybersecurity policies and procedures that resulted in cloud-based email account takeovers exposing personally identifying information of thousands of customers and clients at each firm. The firms are SEC-registered broker-dealers, investment advisory firms, or both. Specifically, the SEC noted that the affected accounts were not protected consistent with firm policies, breach notifications to clients included misleading language, and some of the firms failed to adopt and implement firmwide enhanced security policies and procedures after initial discovery of email account takeovers.
The SEC’s orders against each of the firms found that they violated Rule 30(a) of Regulation S-P, known as the Safeguards Rule, which is aimed at protecting confidential customer information. For two of the firms, the orders also found that they violated Section 206(4) of the Investment Advisers Act and Rule 206(4)-7 in connection with their breach notifications to clients. Although the firms did not admit to or deny the SEC’s findings, each agreed to cease and desist from future violations of the charged provisions, to be censured, and to pay a penalty.
SEC requests comments on digital practices of broker-dealers and investment advisers
The SEC, on Aug. 27, 2021, issued a request for information and public comment on broker-dealers’ and investment advisers’ use of digital engagement practices (DEPs). These DEPs include behavioral prompts, differential marketing, gamelike features, other design elements aimed at engaging with retail investors on digital platforms, and the analytical and technological tools and methods used. Investment advisers use DEPs to learn more about their clients in order to develop investment advice based on that information.
The SEC is issuing the request primarily to:
- Develop a better understanding of the market practices associated with the use of DEPs and the related analytical and technological tools and methods
- Learn what conflicts of interest may arise from optimization practices and whether those practices affect the determination of whether DEPs are making a recommendation or providing investment advice
- Provide market participants and other interested parties an avenue to share their perspectives on the use of DEPs and the related tools and methods
- Facilitate the SEC’s assessment of existing regulations and consideration of whether regulatory action may be needed, including additional investor protections
Comments are due Oct. 1, 2021.
SEC appoints senior adviser to the chair
The SEC announced, on Aug. 25, 2021, the appointment of Barbara Roper as senior adviser to Chair Gensler. Roper’s focus will be on retail investor protections, broker-dealer and investment adviser oversight, and examinations. She joins the SEC after 35 years at the Consumer Federation of America, most recently as director of investor protection, and is a leading consumer spokesperson on investor protection issues, specifically the standards that apply to investment professionals that investors rely on for advice and recommendations. Roper said she plans to bring that focus to her new position.
SEC and the European Central Bank sign memorandum of understanding on cooperation regarding security-based swap entities
On Aug. 16, 2021, the SEC and the European Central Bank signed a memorandum of understanding (MOU) to consult, cooperate, and exchange information in connection with the supervision, enforcement, and oversight of certain security-based swap dealers and major security-based swap participants that are registered with the SEC and supervised by the European Central Bank.
The MOU is intended to facilitate the SEC’s oversight of all SEC-registered security-based swap entities in European Union (EU) member states participating in the Single Supervisory Mechanism (SSM), which is the EU’s system of banking supervision. It comprises the European Central Bank and the relevant national authorities of participating EU member states.
In its announcement of the MOU, the SEC said that the MOU “will also support the SEC’s oversight of the operation of substituted compliance orders that the Commission has issued for security-based swap entities in France and Germany, as well as any future substituted compliance orders for such firms in other EU Member States that participate in the SSM.”
Crowe recaps SEC comment letters in the banking industry
Under the Sarbanes-Oxley Act of 2002, the SEC’s Division of Corporation Finance regularly reviews and occasionally comments on the filings of each SEC registrant. Crowe recaps recent themes from SEC comment letters for banking industry registrants to consider as they prepare disclosures.
