No slowdown expected in rule-making for SEC and DOL

Both the Securities and Exchange Commission and Department of Labor had busy years in 2022, and this year should be no different from a rule-making perspective. But with Republicans now in control of the House, sources expect oversight of each agency to significantly ramp up.

However, that congressional oversight will take up agency bandwidth, but it is unlikely to alter any outcomes, said Jamie D. McGinnis, Washington-based counsel in the corporate department and member of Ropes & Gray LLP's asset management group.

At the SEC, "there are still three Democratic votes on the commission," he noted. However, "The chair, the commissioners (and) the division directors will be asked to be on the Hill with more frequency."

Democrats have a 3-2 majority at the SEC with Chairman Gary Gensler leading the agency.

Of note, House Republicans in December also introduced a bill that would require the SEC to review every final rule it promulgates every three years after implementation.

The bill is unlikely to become law in a divided Congress, but Mr. McGinnis expects to SEC to finalize a lot of rules this year.

"It's certainly been a flood of proposals in 2022," he said. "A handful of rules got adopted but I highly anticipate that balance will shift fairly significantly toward adoption" in 2023.

The SEC was active in 2022 as it proposed 29 rules and reopened comments periods on a host of other proposals.

In 2023, the SEC expects to propose a slew of new rules and finalize many more, according to its latest regulatory agenda unveiled Jan. 4. The agenda features 23 items in the proposed rule-making stage and 29 items in the final rule-making stage.

The proposed rules include enhanced disclosures for companies regarding human capital management and corporate board diversity, respectively; changes to registered investment companies' fees and fee disclosure; and added rules to address the "cybersecurity and resiliency of certain commission registrants."

Many of the rules could be finalized this year, including ones that could reshape large segments of the nation's financial markets and the information public companies and private fund managers must publicly disclose.

Notably, the SEC proposed a rule to require public companies to disclose a host of climate-related information in their registration statements and periodic reports. Under the proposal, public companies would be required to disclose the greenhouse gas emissions they generate or purchase, and the indirect emissions generated from a company's supply chain, if material, though smaller companies would be exempt from the latter requirement, referred to as Scope 3.

The SEC is aiming to finalize the climate disclosure rule by the end of April, according to its agenda.

It listed the same timeline for finalizing several other rules, including ones that would compel private fund managers to provide investors with quarterly statements detailing information about performance, fees and expenses, and another that would shorten the settlement cycle to T+1 — settling a trade one business day after it is executed — from T+2, or two business days.

The SEC has also proposed expanding the "Names Rule" under the Investment Company Act of 1940, which requires funds with certain names — such as those specifying a type of security, industry or geographic area — to invest 80% of their assets in the investments the name suggests, to include any fund names that have "particular characteristics," including those with the terms "growth" and "value," or those indicating the fund incorporates one or more ESG investing factors. The SEC is aiming to finalize that rule by the end of October, according to the agenda.

"Gary Gensler has proven that he's very driven in his view of what the market needs in terms of regulation and if any chairman is going to get things through, it's him," said John J. "Jack" O'Brien, a Philadelphia-based partner with Morgan, Lewis & Bockius LLP. "I would be very surprised if there weren't a number of final rules adopted end of Q1, early Q2 and an equal number of new proposals on that same timeline."

At the Labor Department's Employee Benefits Security Administration, several proposals unveiled in 2022 could be finalized this year.

The proposals include:

• Expanding its Voluntary Fiduciary Correction Program that allows ERISA-covered plan sponsors to self-correct errors they make after failing to send employee contributions or participant loan repayments to retirement plans in a timely manner.
• Requiring more information that plan sponsors and others applying for prohibited transaction exemptions must disclose, like a description of the material benefits to non-plan parties as a result of the transactions the exemption would permit, and a description of each conflict of interest or potential instance of self-dealing that would be permitted if the exemption is granted.
• Modifying its qualified professional asset manager exemption, or QPAM exemption, by, among other items, expanding the types of misconduct that disqualify financial institutions from using the exemption.

The QPAM exemption and prohibited transaction exemption application proposals received pushback from stakeholders during respective public hearings last year.

Both proposals were unveiled before Lisa M. Gomez was sworn in as assistant secretary for employee benefits security in October.

Bradford P. Campbell, a Washington-based partner at law firm Faegre Drinker Biddle & Reath LLP who held Ms. Gomez's position during President George W. Bush's administration, said her presence could lead to some changes with the prohibited transaction exemption application proposal in particular.

"As someone who's actually been a practicing attorney representing plans in this space for 25 years, she has a perspective that I think is different than her career staff about the importance of exemptions," Mr. Campbell said.

According to the department's most recent regulatory agenda released in June, it's also working on a proposal that could broaden who's considered a fiduciary under ERISA by amending the regulatory definition of the term fiduciary. The rule-making "would amend the regulatory definition of the term fiduciary … to more appropriately define when persons who render investment advice for a fee to employee benefit plans and IRAs are fiduciaries," according to the agenda.

"It's interesting that we're two years into a Biden administration and they haven't really done anything on that front," said Michael P. Kreps, Washington-based principal and co-chairman of the retirement services practice at Groom Law Group, about the fiduciary rule.

But the Labor Department and other agencies will now have their hands full carrying out congressional orders laid out in SECURE 2.0, like creating, along with the Treasury Department, a national online lost-and-found database for retirement accounts.

Mr. Kreps said the Labor Department staff will be busy thanks to SECURE 2.0.

"To the extent they had their own agenda and their own plan, SECURE has upset that apple cart quite a bit," he said.