June 29, 2022

SEC Publishes Spring Rulemaking Agenda: Torrid Pace Continues; Crypto Framework Noticeably Absent

On June 22, 2022, the U.S. Securities and Exchange Commission (“SEC” or “the Commission”) released its Spring 2022 "Reg Flex" agenda. The regulatory agenda, set by Chairman Gary Gensler, provides a glimpse into how the agency will prioritize its resources over the coming six months from a policy and rulemaking standpoint. Additionally, the fact that the Commission is soon to be fully staffed may add new views to the mix, although this is unlikely to meaningfully change the rulemaking priorities or their outcomes (with votes likely continuing along party lines).

As expected, the agenda includes several high profile pending rulemakings on which the Commission will vote for adoption, including amendments to Reg. ATS and the definition of "exchange" in Rule 3b-16, eliminating the distinction between dealers and traders, climate change disclosure, private fund regulation, and cybersecurity risk governance.

The agenda also identifies several new proposals, including related to digital engagement practices for broker-dealers and investment advisers, amendments to Regulation SCI and Regulation SP to address registrant cybersecurity disclosures, and equity market structure modernization. It also appears that the SEC will propose rules to narrow exemptions from broker-dealer registration and FINRA membership (likely a rekindling of proposed 2015 amendments to Rule 15b9-1). The agenda also includes “Regulation ATS Modernization” to promote pre-trade price transparency.

In prepared remarks earlier this year, Chairman Gensler previewed what NMS modernization might include. He highlighted possible updates to existing rules and the creation of new rules related to: (i) minimum pricing increments (tick size); (ii) changes to what constitutes the National Best Bid and Offer (“NBBO”); (iii) updates to disclosure of order execution quality metrics (pursuant to SEC Rule 605); (iv) a standalone best execution rule; (v) enhancing order-by-order competition for retail orders; and (vi) reconsidering payment for order flow (“PFOF”), exchange rebates, and related access fees. If the Commission’s recent ambition is any guide, it would not be surprising to see rulemaking proposals across all of these areas. Certain areas highlighted in that speech, like a potential reduction in minimum tick size and harmonization of tick size increments across markets, accelerating adoption of a new round lot definition into the NBBO, appropriately tailored enhancements to Rule 605 disclosures, or even an SEC best execution rule could help further drive efficiencies across markets. The devil, as always, will be in the details. Other proposals, like order-by-order competition or an upending of, or outright ban on, PFOF could have significant disruptive effects across exchanges, brokers, and the investors who rely on them.

Notably absent from the agenda is any regulatory framework for what the SEC terms “digital asset securities.” Some might say that the Rule 3b-16 and dealer/trader proposals could be backdoor and backhanded ways to regulate aspects of digital assets and DeFi (the 3b-16 proposal contains no mention of digital asset securities, crypto, digital currency, or distributed ledger technology, while the dealer/trader proposal mentions digital asset securities only once and it’s in a footnote). The absence of such a framework from the agenda (or even a concept release) is also particularly noticeable in light of recent statements by the Appropriations Committee of the U.S. House of Representatives, noting with respect to digital assets: “The Committee recognizes that digital assets can drive innovation in the financial services sector. New financial products require clear pathways and regulatory structures for stakeholders, developers, and investors. The Committee is concerned that enforcement action in the absence of regulatory clarity invokes confusion in the growing sector. The Committee encourages the SEC to issue public guidance that promotes U.S.-based innovation.”

In an interview with the Financial Times, Chairman Gensler stated that the SEC and U.S. Commodity Futures Trading Commission are discussing a formal arrangement to create “one rule book” for crypto. If the SEC’s agenda is any indicator, such a step would likely not come until 2023, at the earliest (or if ever). One could read the Appropriation Committee’s statement as saying, first thing’s first Chairman Gensler: tell us what you want to do (or at least plan on doing) before we appropriate substantially more resources to you.

The industry should soon expect final rules on recent proposals and a flurry of new proposals to consider during the coming months. Many across the industry are questioning the quantity and quality of recent rulemakings (and unusually brief public comment windows). SEC Commissioner Peirce recently called this out in her statement on the agenda, specifically criticizing the number, scope, breadth, and timing of existing and forthcoming rulemakings. In Peirce’s view, the agenda “sets forth flawed goals and a flawed method for achieving them” and “continues to shun issues at the core of [the SEC’s] mission in favor of shiny objects outside [the agency’s] jurisdiction.”