Senators Want More From SEC’s Gensler on Cryto Regs, Scope 3 Disclosures

There’s a really good analysis at Cooley PubCo of the dynamics arising in the face off between members of the Senate Banking Committee and SEC Chair Gary Gensler over the issue of how the commission wants to regulate crypto, and how that fight is evolving leading up to the mid-term elections. This is especially in light of a pending Supreme Court decision on whether the SEC has the power to regulate issues outside its mandate, such as environmental disclosure regulations.

Gensler spoke last week to the Senate Banking Committee, and while his prepared remarks were nothing new, the back and forth with senators provided a little more insight into where SEC regulation wants to go, and why a lot of legislators have a problem with it. It’s a lengthy piece but definitely worth the read. Here are some of the choice parts.

Committee Chair Senator Sherrod Brown cautioned at the outset that Republicans have “bellyached”—and he assumed would today—about Gensler’s “ambitious agenda,” but added that, “if Wall Street and its allies are complaining,” that means Gensler is doing his job. And right on cue, Ranking Member Senator Pat Toomey cast doubt on recent SEC actions that, he said, raised questions about how well the SEC was handling its responsibility to facilitate capital formation.  Where was the SEC, he asked, when some crypto lending platforms “blew up,” resulting in billions in losses?  And while the SEC has failed to provide regulatory clarity for the crypto market, he contended, it has instead been busy proposing many controversial and burdensome rules that are outside the SEC’s mission and authority. After West Virginia v. EPA (see this PubCo post), he warned, the SEC should consider itself to be on notice from the courts. In particular, some on the Committee—on both sides of the aisle—took aim at the SEC’s climate disclosure proposal—particularly Scope 3 disclosure—and Gensler’s responses made clear that he heard the criticisms, both from the Committee and from commenters, and that there would be some changes to the proposal as the SEC tries to “find a balance.” But far would those changes go?

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The two major topics of conversation, however, were crypto and the SEC’s climate disclosure proposal.  First, with regard to crypto, several Committee members criticized the failure of the SEC to propose rules on crypto.  Toomey said that there were many ambiguities that needed to be clarified by a rulemaking.  He suggested that perhaps Congress needs to step in to redefine “security” and calibrate a new framework for crypto. Brown stressed the need to keep the jurisdictional lines clear on this issue; conflicts could arise if multiple agencies were to decide to redefine “security.” Gensler responded first that crypto was a very small piece of the capital markets, and he wanted to take care not to upset the whole applecart.  In addition, in the views of some Committee members, instead of promulgating crypto regulations that would provide clear guidelines, the SEC seemed to be approaching the issue incrementally through the use of enforcement, individual exemptive orders and one-off discussions—an approach they considered inadequate. Gensler responded that the approach was based on precedent. The SEC had taken that type of long-term exploratory approach before when it needed to develop a regulatory regime for asset-backed securities and ultimately adopted one based on its experience with the issues as they developed over time.

Some of the Committee members enthusiastically favored the SEC’s climate disclosure proposal.  Brown thought that climate transparency was a good way to reveal that risk; however, comparability and clarity were key, which underscored the need for standardization. Senator Catherine Cortez Masto contended that, to avoid greenwashing, we needed “truth in advertising.” Senator Elizabeth Warren contended that the SEC needs to retain the Scope 3 disclosure requirement; if not, companies will simply outsource their high-emission operations.  For many companies, she said, Scope 3 emissions represent the preponderance of their emissions.  Investors need that information, she said, to understand the risk that may be posed by future regulations that may limit emissions and affect those companies adversely.

But a significant number of Committee members expressed concerns about the proposal, Toomey most ardently. He said that it was no secret that some want to use financial regulation to advance their liberal agendas—a practice he viewed as highly undemocratic because it would be accomplished through the use of unelected bureaucrats. He considered the SEC’s climate proposal to be a prime example.  Public companies are already required to disclose material information; in his view, the information elicited by the proposal is expensive to obtain and not financially material.  In fact, he stressed, the cost of compliance with the rule was more material than the disclosure itself.