Gensler draws fire for SEC rulemaking at House budget review

Accusations that SEC overstepped authority outweigh quibbles over plan to focus 13% budget increase on enforcement, exams staff

Members of the congressional subcommittee that called SEC chair Gary Gensler to testify about the SEC’s FY2024 budget request accused Gensler of overstepping the authority of the SEC by proposing rules to regulate climate-risk disclosure, ESG and cybersecurity.

Republican members of the House Appropriations subcommittee also threatened to cut the agency’s budget, demanded that the SEC expand its enforcement efforts, reduce the pace of its rulemaking and refrain from regulations.

Those questions reflect growing opposition to Gensler’s regulatory agenda, which he defends as an effort to reform existing SEC rules and priorities while developing ways to protect the interests of investors amid evolving markets.

The problem is that the SEC budget is too big, the agency costs too much to run, and it focuses too much on the implementation and enforcement of new regulations rather than on trying to encourage the flow of investment capital into the markets, according to the opening statement of Steve Womack (R-Ark.), chair of the Financial Services and General Government subcommittee, who opened the March 29 hearing.

“The blistering pace of the SEC rulemaking is a cause for concern,” Womack wrote, “especially when the SEC is wading into areas that are not within their expertise and constitutionally questionable, such as requiring public companies to report on greenhouse gas emissions while claiming private enterprises won’t be impacted.”

Legislators question the budget of every agency every year, but many are under particular pressure amid House Republicans’ effort to use the debt ceiling as leverage in their budget fight with the Biden administration.

Macro-politics aside, cutting the budget of the SEC “would only leave our economy more vulnerable to turmoil like what transpired with Silicon Valley Bank,” ranking member Steny Hoyer (D-Md.) countered in his opening statement.

Questions about the limits of the SEC’s authority align with a larger push by conservative political organizations and industry lobbying groups to shorten the reach of federal regulatory groups like the SEC and the EPA. That effort has included campaigns attacking ESG investing that have caused some states to limit state pensions’ ability to invest in ESG strategies.

On another front, the SEC is facing unprecedented opposition from a fund-industry movement made up of boards, advisers and groups like the Investment Company Institute and the Independent Directors Council that is working through traditional channels to demand the withdrawal of controversial regulatory proposals and limits on what it calls an overly aggressive regulatory agenda.

SEC request: Budget up 13%, headcount up 170

The SEC’s FY2024 budget request for $2.44bn is 13.3% higher than the $2.12bn it requested for 2023, but focuses on the same goal: Raising total headcount at the agency, which dropped about 3% between 2016 and 2020, to accommodate a market with 22% more registered investment advisers (RIAs) and 60% more RIA clients than it had in 2017, according to the 2024 budget request.

SEC constituency: @30,000 registered entities
  • Registered funds – 16,000
  • Investment advisers – 15,300
  • Broker-dealers – 3,500
  • National securities exchanges – 24
  • Alternative trading systems – 101
  • Credit-rating agencies – 10
  • Self-regulatory organizations – 33
  • Registered clearing agencies – 7

Source: SEC FY budget justification and performance plan

The FY2024 budget includes funding to add 170 new positions during FY2024, on top of the 400 new positions approved for 2023 that are still being filled, Gensler wrote in his statement to the committee.

The 170 positions requested by the SEC, which are not all full-time, boil down to just 43 full-time equivalents (FTEs) – the largest number of which, 13, would go to the Division of Enforcement, with another five going to Examinations.

The Division of Investment Management would get three new FTEs, divided among 13 new positions.

Altogether, the SEC would go from 4,685 FTEs currently to 5,139 FTEs after completing the hires approved for 2023 and proposed for 2024.

Where SEC will add staff

Additional FTEs requested for FY2024

  • Enforcement          13
  • Examinations           5
  • Corp.Fin.                    2
  • Trad/Markets           2
  • Invest. Mgmt.          3
  • Econ/Rsk.Analysis 3
  • Gen. Counsel          1
  • Other Offices          3
  • Admin/Support    11

Source: SEC FY budget justification and performance plan

Most of the more pointed questions aimed at Gensler included accusations based on the largely debunked assumption that no U.S. regulatory agency other than the Environmental Protection Agency has legislative authority to regulate anything involving the environment.

“You do not have clear authority to mandate climate-related data gathering, though you may be trying to skew that,” Michael Cloud (R-Texas) said during his turn to question Gensler.

“I’m concerned about the argument for adding employees when you’re having them do things with no authority,” he said.

Gensler told the committee the SEC does have authority under the investment acts to regulate disclosure of data material to investors, pointing out that the SEC has had regulations covering environmental issues on its books since the 1970s.

“Can” is not the same as “should,” however, especially in the case of agencies responsible for particular, very important parts of the U.S. economy, according to Jerry Carl (R-Ala.).

“The primary purpose of the SEC is to enforce laws against market manipulation, maintain fair markets, and facilitate capital formation. What does that have to do with climate emissions?” Carl asked Gensler during the hearing.

There is heavy demand among investors for information about how well a company recognizes climate-related risk to its business operations, and thousands of companies respond by disclosing more and more climate-related data every year, Gensler told the committee.

In previous efforts to explain the rule, SEC officials have said that, since climate data is already disclosed publicly, and investors already use it, the SEC is simply defining what data should be disclosed and how, rather than introducing a completely new requirement to the market.

Opponents of the rule have said it would go far beyond simply making disclosures consistent, arguing that it would require a much higher volume of data of more types and at more cost than is usual for companies reporting voluntarily, even if the Scope 3 requirement that companies disclose greenhouse-gas and risk data about companies in their supply chains as well as themselves were not included in the final rule.

Gensler confirmed that the SEC is examining the flood of negative feedback it received about the rule, and is considering eliminating the Scope 3 requirements along with other potential changes, though he emphasized none of those decisions has been made.

Ashley Hinson (R-Iowa) took a more aggressive stance that included accusations based on the false assumption that the SEC rules would affect every company, regardless of size or status.

“I see it as a true weaponization of the department. Iowa farmers, Iowa businesses see it that way too,” she said. “I’m also concerned about the expansive reporting requirements for Scope 3 green-house gas emissions and the devastating impact that would have for Iowa farmers because large corporations have teams of attorneys that can help them comply; farmers don’t have that, so I’m very concerned about the precedent that’s being set here.”

“Our remit is on the 7,000 or 8,000 public companies out there, and just over the public companies, so it’s not the farmers that you’re referencing who would be affected,” Gensler said.