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The SEC is always unclear

Before causing more business uncertainty, the agency should make rules for crypto and change rules about climate risk that are too strict.

Earlier in September, Securities and Exchange Commission (SEC) chairman Gary Gensler appeared for the second time before the U.S. Senate Committee on Banking, Housing, and Urban Affairs to provide the agency’s annual oversight testimony. His first appearance had demonstrated his commitment to an ambitious and aggressive SEC agenda that would limit investor options under the guise of so‐​called investor protection. While a lot has changed in the past year — consider the 34 rule proposals — Gensler’s commitment to his agenda has not wavered. That’s a shame.

Ralph Waldo Emerson wrote that “a foolish consistency is the hobgoblin of little minds.” Unfortunately, such a hobgoblin stalks Gensler’s thinking in two important areas: cryptocurrency regulation and climate‐​risk disclosures.

On crypto, Gensler’s testimony stuck to well‐​worn talking points to conclude that most crypto tokens are securities, and crypto intermediaries must register with the SEC because at least some of the tokens they touch are probably securities. Gensler’s one‐​liner, “Not liking the message isn’t the same thing as not receiving it,” does little to quell the concerns of crypto developers, intermediaries, and end users whom the SEC has not provided with clear guidance. In an extended colloquy with Senator Pat Toomey (R., Pa.), Gensler refused to explain why he does not consider Bitcoin to be a security — compared with the “vast majority” of tokens that he does consider to be securities — and his agency has still not offered guidance on how to determine a token’s status. Gensler also avoided using the word “decentralization,” consistent with previous statements of his, which suggests that he is skeptical about the very concept.

SEC Is Investigating Decentralized Crypto Exchange Uniswap: Report

But even if there was a clear way to determine that a token is to be regulated by the SEC, Gensler doesn’t determine what rules should be applied. He has admitted that general securities disclosures may not make sense for crypto issuers, and that there are open questions about how to apply exchange rules to crypto intermediaries, but he has pointed to no SEC effort to create an applicable disclosure framework or generally applicable rules for these intermediaries. His solution, instead, is to ask the crypto industry to come in and work out one‐​off solutions, or else be subject to enforcement actions that provide one‐​off “guidance.” But, as newly appointed SEC commissioner Mark Uyeda notes, this type of regulation is inadequate. Gensler should formalize rules applicable to crypto through notice‐​and‐​comment rule‐​making, and that process should start now, not in a decade, as he suggested during his testimony.

On climate‐​risk disclosures, Gensler should get some credit for repeatedly acknowledging that requirements for public companies to disclose greenhouse‐​gas emissions from their supply chains, also known as Scope 3 emissions, may have unintended consequences for private companies, including for family farms. But that acknowledgment should not overshadow the fact that Gensler remains committed to the massive climate‐​risk‐​disclosure framework set out in a recent SEC proposal that, according to the agency’s own estimates, will nearly triple compliance costs for public companies.

Besides the legitimate question of whether the SEC has the authority to impose these disclosure obligations, and the hurdle crystallized in the Supreme Court’s West Virginia v. EPA ruling, Gensler steadfastly refuses to consider the evidence that these disclosure obligations risk burdening companies and their shareholders with high regulatory costs while providing little information of value for investors. As Senator Bill Haggerty (R., Tenn.) pointed out, such new regulatory requirements add to the “already crippling cost” of being a public company. This regulation would act as a powerful disincentive to going public, which will decrease the number of companies available to investors. At least there’s still hope that the SEC’s review of the more-than-14,000 comment letters it received will result in a reconsideration of these onerous disclosure rules.

The SEC, under Gensler’s leadership, should heed the increasingly louder calls (including those coming from the White House) for much‐​needed clarity on crypto regulation, and it should revisit proposed climate‐​risk disclosures to ensure that investors do not lose out on unrealized opportunities stifled by unclear or burdensome regulation. Consistency is often an admirable quality in a regulator, but the consistent failure to consider new evidence is not.

By Jennifer J. Schulp. This article appeared in National Review (Online) on September 28, 2022.


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