Five key SEC priorities in 2024

The SEC’s disclosure rulemaking under Gensler seeks to increase the types of information available to meet evolving investor needs as well as to increase transparency and comparability. These objectives have been welcomed by many, particularly in the investor community, although some others have expressed concern about the extent, cost and feasibility of the proposals. Certain stakeholders also have raised concerns about the process followed by the SEC to propose and incorporate feedback from the public on rule proposals, including “too-short” comment periods. Some market participants also have expressed concern about overlapping rule proposals issued at different times, making it hard to provide input on the collective impact of the proposals. The Commission has sought to address process concerns by, for example, making sure that market participants have at least 45 days to provide comments on rule proposals and reopening comment periods when a subsequent rule proposal or other development could impact commenters’ views on an earlier rulemaking.

Expected activity in 2024: Final rules

Climate: In 2024, the SEC is expected to finalize perhaps its most highly anticipated rule under Gensler’s leadership, which would require public companies to disclose climate-related information. The proposal seeks to enhance and standardize disclosures that public companies make about climate-related risks, their climate-related targets and goals, their greenhouse gas (GHG) emissions, and how the board of directors and management oversee climate-related risks. The proposal would also require companies to quantify the effects of certain climate-related events and transition activities in their audited financial statements. In discussing the proposal, Gensler has noted that many companies already provide — and investors use — this type of information.

Public comments on the proposal show significant support for certain mandatory climate-related disclosures. However, perspectives differ drastically on some specific elements of the proposal, such as the disclosure of Scope 3 GHG emissions (defined as all indirect emissions in a company’s value chain not included in Scope 1 or Scope 2 emissions),ᶦᶦ financial statement disclosure and the time frame for implementation. Republican Commissioners Hester Peirce and Mark Uyeda have voiced concerns about the proposal, including that it is overly prescriptive and would require disclosure of immaterial information. They also have challenged whether the proposal would provide benefits, such as comparable, consistent and reliable disclosures. Gensler has indicated that the SEC staff is seeking to address concerns raised by commenters and members of Congress, including how to shield small businesses from being indirectly subject to the proposal’s Scope 3 GHG disclosures because of their work with public companies.

According to the SEC Regulatory Flexibility Agenda, the final rule is expected to be considered by April 2024. The date has been moved on several occasions, though, so this timing is uncertain. In the meantime, the SEC staff is expected to continue to ask questions about issuers’ climate-related disclosures in comment letters to issuers along the lines of the staff’s sample comment letter.

California and EU climate disclosure rules

California and the European Union (EU) are two jurisdictions that have already finalized climate-related disclosure legislation that is expected to impact many US companies. In both cases, the related requirements will begin to take effect after a period of rulemaking to implement the legislation. The California and EU requirements are similar to some of those proposed by the SEC but also contain important differences. It is not yet clear whether the California and EU legislation will impact the SEC’s rulemaking process.

SPACs

In January 2024 the SEC finalized disclosure rules for special purpose acquisition companies (SPACs). In discussing the final rule, Gensler stated that SPACs function as alternative initial public offerings (IPOs) and that the final rule is intended to provide the same investor protections available for a traditional IPO. For example, the final rule removes the safe harbor protections for projections and other forward-looking information. The final rule requires new disclosures when a SPAC conducts an IPO and when it combines with a private operating company in what is known as a de-SPAC transaction, among other changes. The disclosures include information about SPAC sponsor compensation, conflicts of interest, shareholder dilution and the target company.

Expected activity in 2024: Proposed rules

During Gensler’s tenure, the SEC has taken several actions relating to shareholder proposals and the proxy process that have been priorities for the investor community but generally opposed by issuers. These actions include finalization of a universal proxy rule, modification of rules that apply to proxy advisory firms and changes to a staff legal bulletin on whether certain shareholder proposals can be excluded from proxy statements under Rule 14a-8. In 2024, the SEC plans to finalize a rule on shareholder proposals and faces litigation relating to its proxy advisory rule.

A topic that may become more active in 2024 relates to private companies. The securities laws provide exemptions from most disclosure requirements to companies if they meet certain thresholds relating to the number and financial sophistication of their shareholders. One aim of the exemptions is to help smaller, higher-risk companies raise capital from parties that can understand and bear that risk.

In recent years, the number and size of companies taking advantage of these exemptions has increased, and the amount of money flowing into private capital markets now greatly exceeds that going into public markets. This has sparked debate among commissioners and other stakeholders about whether the exemptions appropriately balance the investor protections and transparency available in the public capital market vs. the potential for higher investment returns and innovation in the private capital market. Expressing the view that more investor protection is needed, Democratic Commissioner Caroline Crenshaw has stated, “Increasing access to certain investments should not come at the expense of decreasing the basic investment protections that should be available to all investors.” Commissioner Peirce has supported maintaining or expanding the exemptions, saying, “Enhanced access to private capital is a positive development not only for companies, but for investors. Having a robust private market contributes to the health of our economy, and we should not look to impose public-market-style regulations on private markets. We instead should look for ways to reduce the costs companies face in going and staying public.”

Expected activity in 2024:

The SEC has two rule proposals on its agenda for 2024 that would impact private companies by changing the thresholds for companies to qualify for exemptions from registration with the SEC and its disclosure rules. The proposals would do this by revising certain definitions. One rule proposal would amend the “held of record” definition for purposes of the Securities Exchange Act of 1934. The other would modify Regulation D, including the definition of “accredited investor.” SEC officials have not provided recent views on what these rules could look like, although the SEC staff sought public input on possible changes to the accredited investor definition in a December 2023 research report, which could help shape how proposed rules are drafted. The SEC’s Investor Advisory and Small Business Capital Formation committees also discussed the exemptions in 2023 and may provide recommendations to the Commission on next steps.

Notable actions in 2023:

In 2023, the Commission increased transparency requirements for private funds and advisers, another set of market participants that had been largely exempt from SEC disclosures. One of these rules requires new current reporting by large hedge fund advisers and advisers to private equity funds of events that cause significant stress, among other information. Another final rule requires private fund advisors to provide investors with quarterly statements detailing information about private fund performance, fees and expenses. It also prohibits private fund advisors from providing preferential treatment to certain clients unless disclosed. The Fifth Circuit Court of Appeals is considering a petition filed by several industry groups to halt this rule on the grounds that the SEC acted arbitrarily and capriciously and exceeded its authority in requiring this information.ᵛ

In FY23, the Commission filed a total of 784 enforcement actions — a 3% increase over the prior year. In addition, nearly $5 billion in financial remedies was ordered by the SEC last year, including civil penalties and disgorgement — the second highest amount in SEC history, after the record-setting amount ordered in FY22. The SEC also obtained orders barring 133 individuals from serving as officers and directors of public companies, the highest number of officer and director bars obtained in a decade.

Five principles Gensler expects the SEC Division of Enforcement to consider

Restoration of public trust was a theme Gurbir Grewal, Director of the Division of Enforcement, continued to discuss in 2023 public remarks. In particular, Grewal has appealed to gatekeepers and compliance professionals to work together to create “a culture of proactive compliance,” which he has said involves education, engagement and execution.

As has been the case in recent years, the SEC continues to use its whistleblower program to further its enforcement agenda. FY23 was a record-breaking year for the SEC’s whistleblower program, including the highest amount of whistleblower awards in a single year — as well as a record-breaking number of whistleblower tips in 2023. Indicating the importance of the whistleblower program, the SEC also pursued enforcement actions against companies for seeking to limit employees’ ability to communicate concerns about potential securities law violations with the SEC.

The agency’s FY23 enforcement actions covered a range of topics and market participants. Some of the areas of particular focus were financial fraud and issuer disclosure, gatekeepers (such as auditors and lawyers), crypto assets, cybersecurity compliance, and environmental, social and governance (ESG) issues.

Expected activity in 2024