House Republicans Air SEC Grievances at Oversight Hearing

The U.S. House Committee on Financial Services held an oversight hearing on Tuesday in which Securities and Exchange Commission Chairman Gary Gensler testified for approximately five hours.

The hearing covered many topics, including the SEC’s climate risk disclosure proposal, its swing pricing and hard close proposal and artificial intelligence, among other items. Many members were critical of procedural flaws at the SEC, such as the inadequate length of comment periods and a “breakneck pace” of rulemaking.

Swing Pricing

The SEC’s November swing pricing drew attention for the problems it could cause for certain retirement plan investors. Some representatives expressed skepticism on the grounds that it could hurt retirement savers, especially those who live in the Pacific Time Zone.

The proposal would require mutual funds to impose a hard close at 4 p.m. ET, meaning an investor must have placed a buy or sell order by that time to receive that day’s price for a fund. Since many retirement accounts trade through intermediaries, those orders must be sent even earlier to ensure they are received in time; otherwise, they would have to processed at the following day’s price.

Americans held $6.6 trillion in defined contribution retirement plans as of December 31, 2022 and 62% of those assets, or $4 trillion, were in mutual funds, according to the Investment Company Institute data.

Representatives Young Kim, R-California, and Steven Horsford, D-Nevada, pointed out to Gensler that investors in the Pacific Time Zone might have to get their orders in by 9 a.m. local time just to get that day’s price, since they estimate that orders for retirement accounts would have to be in by 12 noon ET.

Climate Disclosure

The SEC proposed in March 2022 to require public companies to disclosure their material risks related to climate change, their direct greenhouse gas emissions and their indirect emissions from electricity consumption. Some companies would also have to disclose Scope 3 emissions: emissions in their supply chain.

The proposal was favored by all the committee’s Democrats who remarked on it, usually on the grounds that it will inform investors so they can account for climate risk. It was opposed by many of the Republicans on the Committee, typically because they feel it exceeds the SEC’s authority under securities laws, that it will provide a large compliance burden on businesses and because the SEC has no expertise in climate issues. Representative Blaine Leutkemeyer, R-Missouri, joked that Gensler is effectively acting as if he were the director of the Environmental Protection Agency because of the scope of the SEC’s climate risk disclosure proposal.

Gensler provided a defense he has given elsewhere: Many securities issuers are already providing these disclosures, and the SEC is merely looking to make sure that they are truthful and consistent. He added that the proposal is almost universally supported from investors who sent in comments to the SEC, though he admitted that the comments from issuers were more mixed.

Representative Sean Casten, D-Illinois, a strong supporter of the proposal and co-founder of the Congressional Sustainable Investment Caucus, said at the hearing that because of inadequate disclosure of climate risk, many real estate investments are overvalued because physical climate risk, such as flooding, is not being considered by investors. He said he worries that, over time, more sophisticated investors who are aware of this overvaluing will try to sell these assets to less sophisticated investors unaware of the risk involved. He added that uniform climate risk disclosure would mitigate this possibility.

Representative Alexander Mooney, R-West Virginia, said the proposal amounts to naming and shaming, will cost jobs and “will be devastating to the state of West Virginia.” He accused the SEC of trying to shift capital toward social and political goals.

Artificial Intelligence

Gensler also spoke briefly on the importance of regulating artificial intelligence. He highlighted robo-advising and predictive analytics as emerging areas the SEC will have to regulate in the future.

Representative Juan Vargas, D-California, took interest in Gensler’s comments about AI and asked him to elaborate. Gensler responded that AI could be used in the future for things such as compliance and sentiment analysis. He added that one of the more important areas of future regulation will be the programming of AI from a fiduciary perspective; in other words, ensuring that AI is programmed to seek out a client’s best interests and how it is programmed to do so.