SEC's rules moving too fast, industry says

As the SEC moves forward with a number of important rule proposals this year, some industry leaders and commissioners themselves have expressed concerns regarding the pace of the agency's rule-making.

Karen Barr, Washington-based president and CEO of the Investment Adviser Association, a trade association representing fiduciary investment adviser firms, described the SEC's rule-making pace as "very aggressive."

"The SEC has issued not only a large number of rule proposals, but the significance and substance and complexity of the rule proposals … these are all big deals," she said. "These are rule-makings that could dramatically shift the landscape for investment advisers in a lot of different aspects."

The agency has an ambitious agenda for the year — its 2023 regulatory agenda, published in January, listed 29 items in the final rule-making stage and 23 items in the proposed rule-making stage.

This includes the controversial climate disclosure rule proposal, which the SEC is aiming to finalize in April, according to its agenda.

The SEC's two Republican commissioners have joined several trade associations in saying the pace of the agency's rule-making could overwhelm its regulated entities with too many comment periods and compliance deadlines at once.

The SEC did not respond to a request for comment.

At the IAA's Investment Adviser Compliance Conference in mid-March, Commissioner Mark T. Uyeda expressed concern about inundating businesses with several up-coming compliance deadlines.

When it comes to deciding rules' implementation dates, "at least in my opinion, we can't have these hit all at the same time," Mr. Uyeda said.

Commissioner Hester M. Peirce said at an SEC meeting March 22 that registrants "have been flooded with proposals over the past two years." And while the agency needs commenters' feedback on each rule proposal they approve, Ms. Peirce said, "commenters are overwhelmed at the moment."

"I have serious concerns with the pace and scale of the SEC's current agenda," Eric J. Pan, Washington-based president and CEO of the Investment Company Institute, a trade association representing regulated investment funds, said March 20 at the ICI Investment Management Conference.

"The commission has issued a slew of rule proposals on a wide range of topics where much more work needs to be done to understand their cumulative effect on the markets and investors," he added. "Many of the rules also seem to fall into the category of solutions in search of articulated problems."

Several of the SEC's recent rule proposals have received scrutiny from the investment industry, including their swing pricing proposal, released in November, and the fund names rule proposal, released in May. Mr. Pan specifically called out the swing pricing proposal for presenting "scant evidence of a real problem to solve," in a Feb. 14 news release.

The former proposal would require any open-end fund — other than a money market fund or exchange-traded fund — to use swing pricing, which adjusts a fund's value based on trading activity, so that redeeming shareholders bear the costs of transactions, rather than diluting other shareholders. The latter would expand the "Names Rule" under the Investment Company Act of 1940 — which requires funds with certain names to invest 80% of their assets in the investment the name suggests — to any fund names that have "particular characteristics," including those with the terms "growth" and "value," or those indicating the fund incorporates one or more environmental, social and governance investing factors.

IAA's Ms. Barr said the trade association is mostly worried about overlapping compliance deadlines.

"There's this huge raft of rule-making," she said. "And if the SEC follows what it has proposed, investment advisers are going to have to comply with all of these new rules at the same time."

Mr. Uyeda pointed out at the March IAA conference that there are already two finalized rules that have 2024 compliance dates, and the implementation dates of several other proposals are still yet to be determined.

Ms. Barr also expressed concern that the implementation of new rules will be done by the same people at an investment adviser firm each time, which creates more burden on fewer people.

The solution to the problem is multifaceted, Ms. Barr said, but the first thing the SEC can do is stagger compliance deadlines for rules that are finalized.

Mr. Uyeda agreed that staggering implementation dates is important at the IAA conference in March.

When it comes to rule proposals, "I do believe the SEC should slow down their pace and allow for longer comment periods," Ms. Barr said, but also suggested "(allowing) for more time to comment on interrelated proposals."

"There are a lot of rules that have been proposed that affect each other," she added. "And there's been little or no recognition, by the SEC, in those proposals of the impacts."

Specifically, the SEC's proposed rule to expand reporting requirements for large hedge funds and private equity firms is similar to another rule proposal, released last January, that would also impact reporting requirements for the same groups, Ms. Barr said.

The proposals specifically propose amendments to "Form PF," which private fund advisers, such as hedge funds and private equity firms, use to inform the SEC, Commodity Futures Trading Commission and Financial Stability Oversight Council with confidential information about the basic operations and strategies of their private funds.

The SEC was planning to release the final version of the former proposal at its most recent meeting March 22, but ended up removing the vote from the meeting's agenda. Ms. Barr criticized the SEC for planning to finalize just one proposal without acknowledging the other.

Asked in advance of the meeting why the item had been removed, an SEC spokeswoman said in an email: "As Chair Gensler has said in the past, the commission considers rule-making actions when the commission and staff think they're ready. It's been a busy few weeks, and the commission decided to take a little more time with the Form PF adoption release."

SEC Chairman Gary Gensler has repeatedly pushed back on claims that his rule-making is too aggressive. At an IAA event in September, Mr. Gensler told Ms. Barr: "I think it's part of our job to make sure that the markets are more resilient."

However, even an October report from the SEC's Office of Inspector General found that some staff members at the agency have experienced difficulty managing resources due to the fast-paced rule-making.

Certain staff members said "the more aggressive agenda — particularly as it relates to high-profile rules that significantly impact external stakeholders — potentially (1) limits the time available for staff research and analysis, and (2) increases litigation risk," according to the report.

At a House Appropriations Committee hearing on March 29, Rep. John Moolenaar, R-Mich., pressed Mr. Gensler about the OIG report, asking him if "this aggressive rule-making agenda has placed a strain on your staff."

Mr. Gensler replied, "I am quite confident in the staff," and said that his rule-making agenda is consistent with the pace of former SEC Chairman Jay Clayton, as well as other previous chairs.

Amy Borrus, Washington-based executive director of the Council of Institutional Investors, a non-profit, non-partisan association of pension funds and other U.S. asset owners, noted that while "this is certainly the most sweeping regulatory revamp at the SEC in decades," there's some initiatives that are new and some that date back years.

"From CII's perspective and the perspective of many of our institutional investor members, we're heartened that the reforms Gensler is championing are investor friendly, for the most part," Ms. Borrus said.