The Securities and Exchange Commission obtained record monetary sanctions in the latest fiscal year and advanced two more regulatory initiatives on 2 November as part of chair Gary Gensler’s campaign to overhaul the rules of Wall Street.
Gensler said the SEC took in $6.4bn for the 12 months ended 30 September, his first complete fiscal year on the job. That beat the previous record, set in fiscal 2020, by nearly 40%, underscoring Gensler’s enforcement focus on high-profile cases and steep penalties for misconduct.
Separately at a meeting on 2 November, the commissioners finished a proposal requiring money managers to disclose more information about how they use their voting power in public companies, including on executive compensation. It also proposed a rule aimed at making mutual funds more resilient to market stress.
Gensler is moving forward with an agenda that he says will hold companies more accountable to their shareholders, save investors money by wringing excess profits from intermediaries and shore up financial stability. Gensler, a Democrat nominated by President Biden, has said he also wants to deter Wall Street firms from viewing regulatory settlements as a cost of doing business.
While the number of enforcement actions filed by the SEC remained steady around 700 in fiscal 2022, the agency obtained orders for some of its highest fines ever and claimed a record $4bn in civil penalties.
The Wall Street Journal reported last week that the SEC had levied fines of $2.2bn against exchange-listed companies during the latest fiscal year.
“Hopefully, market participants take notice of these high-impact cases and change behaviour,” Gensler said during a speech on 2 November before the Practising Law Institute.
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Some industry groups have said Gensler’s plans are overly aggressive and could lead to unforeseen costs.
“The Commission must realise that rushing ahead with consequential proposals, fundamentally altering the shareholder experience, is a hallmark of the ‘regulation-by-hypothesis’ approach that the agency’s leadership is now known for,” said Eric Pan, president of the Investment Company Institute.
A civil law enforcement agency that enforces investor protection laws, the SEC directly supervises brokers, asset managers and stock exchanges. That makes such entities reluctant to fight the agency in court, defence attorneys say, giving the SEC leverage to jack up penalties when it wants to send a message.
Gensler’s regulatory agenda has stirred opposition from Republicans and industry groups representing some of Washington’s most powerful constituencies: private equity firms, hedge funds, mutual funds, broker-dealers and the US Chamber of Commerce.
The SEC advanced two rule-making items on 2 November in party-line votes.
The first rule, set to take effect in July 2023, requires SEC-registered funds and investment managers to make it easier for investors to analyse their corporate proxy votes. They will also have to disclose the number of shares they vote, as opposed to the number left out on loan to short sellers, a provision the SEC says will help investors monitor funds’ involvement in corporate governance. Finally, the rule requires money managers to annually report each say-on-pay vote they cast, fulfilling a provision of the 2010 Dodd-Frank Act.
The popularity of index funds fuelled the rise of a small group of money managers in the past decade, giving firms such as BlackRock and Vanguard influence over issues that appear on corporate proxies. These often include executive compensation, boards of directors and matters related to the environment, diversity and corporate governance.
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The commission’s three-Democrat majority voted in favour of the rule. Gensler said the goal of the new requirements is to help investors understand how their shares are being voted. Republicans Hester Peirce and Mark Uyeda dissented, saying the rule is likely to benefit activists seeking to use the shareholder voting process to advance goals unrelated to a company’s profitability.
The commission also advanced a proposal to change rules governing mutual funds. That rule would require mutual funds to adopt swing pricing, which aims to offset the risk that a fund facing a wave of redemption requests primarily sells off its most-liquid holdings first.
Instead, the SEC proposed requiring funds to estimate the costs of selling a vertical slice of a portfolio — including assets that are harder to unload — and allocate them to investors who are redeeming their shares.
Central bankers and the International Monetary Fund have urged market regulators to consider swing-pricing requirements to make mutual funds less vulnerable to investors bolting when financial markets decline. Gensler said on 2 November he believes the SEC’s proposed changes would make the financial system more resilient.
Both Republican commissioners dissented against the proposal, which Pan also criticised.
“It will be fund investors, administrators and intermediaries who will pay the price should this tragedy unfold,” Peirce said, likening the proposed rule to a Greek tragedy.
The SEC will receive public comments on the proposal for at least two months before deciding whether to move forward with a final rule.
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This article was published by The Wall Street Journal, a fellow Dow Jones Group brand