The SEC has been busy in 2023. During the first quarter, the Commission issued nine rule proposals, which added up to over 2,000 pages combined. Many of them touched on a variety of crucial issues, including cybersecurity, custody and privacy.
And while that flurry of activity was an aberration based on historical standards, it represents the norm under Gary Gensler’s chairmanship. Since becoming head of the SEC in 2021, he has presided over a rulemaking agenda that is too much, too fast.
It’s important to note that rulemaking is not, in and of itself, a bad thing. Proper rulemaking can help advance industry interests and enhance the investor experience. We have consistently held that view.
Indeed, our members have a long history of supporting common-sense regulations that protect investors and make markets work better for everyone. The best example is Reg BI. Our membership has committed substantial resources to ensure that it’s successfully implemented and protects investors long-term.
Yet, the recent deluge of rule proposals is nonetheless problematic.
One big issue with the SEC’s ongoing accelerated and scaled-up approach is that it doesn’t allow the industry to provide thoughtful, helpful and meaningful feedback during the allotted comment periods. For instance, our process for drafting a comment letter is lengthy, one that takes weeks – maybe even months – to complete.
It begins with outreach to you, our members. Then, we have a dialogue with subject matter experts to hear their perspectives as well. That multi-pronged approach serves two important purposes.
First, it allows us to fully understand the real-world implications of a rule proposal. Secondly, it helps to ensure that any suggestions we have to improve rules are clear-headed, rational and measured.
In light of how long this process takes – and considering how many rule proposals have been in motion at any given time over the last couple of years – it’s fair to ask whether it’s possible for the SEC to hear what it needs to from the industry. Indeed, it’s not always possible for those with the most expertise to provide constructive comments on every proposal given the time constraints – which forces many to pick and choose which ones to respond to.
To help address this challenge, the SEC should allow for more extended comment periods. Otherwise, rules will be implemented without an adequate number of industry participants getting an opportunity to weigh in on them. That doesn’t benefit the regulators, the industry or other important stakeholders, including investors.
What’s the Problem?
Another issue is that it’s not always clear what problem the Commission is trying to solve when it issues a proposal. For example, in a recent comment letter regarding revisions to the SEC’s custody rule, we questioned whether the projected impact on investor protection is appropriately aligned with the additional burdens – including higher costs – that investment advisers would need to endure to comply.
But this concern is not limited to the custody rule proposal. Not only should the Commission always consider how much time, effort and resources it takes to comply with new rules, but it should think about whether those rules will have a meaningful impact (i.e., protect investors or make the market work more efficiently). If not, the SEC should re-think whether they are necessary.
Always at Odds?
Often, the presumption is that the SEC and the firms and advisors it regulates are always in conflict. That’s not always the case. Most in financial services – including FSI – are willing to support rules that make the industry work better for the greatest number of stakeholders and protect market participants.
Still, the SEC must be willing to hear constructive criticism from the people implementing the rules. Because when that occurs, it results in better and more effective outcomes for all. Sadly, though, the pace and breadth of today’s rulemaking is not allowing that to happen.
That’s why on behalf of our members, as well as the industry, we continue to implore the SEC to slow down, take a deep breath and consider whether its current approach to rulemaking is good for anyone – advisors, firms, the markets and investors.