The Chamber of Commerce recently convinced a court to knock down a stock-buyback reporting rule — handing Gensler his first major defeat — and is targeting another regulation on shareholder advisers. Investors are looking to block game-changing private-fund reforms, with oral arguments set to begin Feb. 5. Hedge fund groups are challenging new disclosure rules. And business associations are threatening to go after more than a half-dozen other planned rules, including one of Gensler’s most ambitious proposals —
a climate risk reporting mandate.
“It’s a minefield for the SEC,” said Kurt Gottschall, the former regional director of the agency’s Denver office who is now a partner at the law firm Haynes Boone. “The more ambitious the rulemaking, the more ambitious the pushback.”
The clashes are landing at a perilous time for regulators, with industry groups lodging arguments that have the potential to knock down decades-old powers, depending on how the courts rule. Conservative judges across the country, including at the Supreme Court, have shown a growing interest in reviewing agency authority, part of a broader attack on the so-called administrative state.
Former Labor Secretary Eugene Scalia, one of the country’s premier administrative law litigators, told POLITICO that the Supreme Court is “engaged in the most probing examination of the limits and powers of the administrative state that we’ve seen since the New Deal.”
One example: The high court recently indicated that it could soon give
judges more authority to override agencies in a landmark case revolving around a 40-year-old precedent known as Chevron deference.
“The SEC is now running into a judiciary that is less deferential, more conservative and more hostile to the administrative state,” said a former senior agency official, who was granted anonymity because they are not authorized to speak publicly. “What might have appeared doable just two years ago at the start of the Biden administration might not seem so [now].”
Financial firms say Gensler’s proposals often lack justification and go beyond the agency’s powers. In some cases, the industry has successfully lobbied the SEC to pull back on its plans.
Gensler’s allies argue that the reforms are crucial to protecting investors, and the agency is vowing to fight back. It already won twice in district court on challenges against new rules for shareholder advisers, though those are both now being appealed.
The SEC chair has framed the lawsuits as part of the natural push and pull between the regulated and their supervisors, calling it “part of our great Democracy.” But he insists the SEC is operating within the bounds of its authority.
“We live within the law and how the courts interpret our laws,” Gensler told reporters last week. “And if and as the courts address issues, we take that into consideration, and we adjust.”
An SEC spokesperson added in a statement that the agency is “updating its rules for the technology and business models of the 2020s and to promote the efficiency, integrity, and resiliency of the markets.”
Gensler’s agenda is sprawling, with plans ranging from climate disclosure and stock-trading reforms to highly technical but massive changes in the Treasury market.
Of the 32 rules adopted since he took office in 2021, only six have formally been challenged, Gensler says. Major reforms tied to cybersecurity disclosures, the Treasury market and money market funds have been left untouched and are already beginning to take effect — even though they’re also unpopular with many firms. And while the SEC’s stock-buyback rule was vacated, the agency netted some wins in the case with the court throwing out arguments that it violated the First Amendment and didn’t allow enough time for public feedback.
Yet the legal attacks from industry groups are becoming broader and bolder.
At least eight different groups are fighting new SEC rules — some like MFA, a hedge fund group, for the first time. MFA President and CEO Bryan Corbett said the group sees litigation as “a last resort.”
Meanwhile, new industry entities are popping up in the conservative Fifth Circuit Court of Appeals in New Orleans, with one, the National Association of Private Fund Managers, suing the SEC twice last year.
The Investment Company Institute, which represents the fund industry, has written several letters to the SEC alongside a new Texas-based affiliate member called ICI Southwest, which would have standing to sue in the Fifth Circuit. A person familiar with ICI and ICI Southwest who was granted anonymity to discuss private conversations said it’s “no accident” that the group is located in the Fifth Circuit, which many conservatives view as industry-friendly.
“We are certainly willing to consider litigation,” ICI spokesperson Stephen Bradford said of a pending SEC plan over mutual fund pricing.
Scalia, the son of the late Supreme Court Justice Antonin Scalia, said companies are feeling emboldened to take on powerful agencies.
“Regulated entities are being pressed very hard by costly, onerous rules being proposed by the SEC and other agencies,” he said. “And they’re feeling compelled to defend themselves by bringing regulatory challenges that, historically, they’ve preferred to avoid.”
Scalia is representing the American Investment Council, MFA and other industry groups in the lawsuit targeting the SEC’s private funds rule, which would impose a raft of reporting mandates and restrictions on private equity firms, hedge funds and venture capitalists. The Bank Policy Institute, which represents big banks, also recently hired Scalia to advise on potential litigation over a plan by bank regulators to hike capital requirements by up to 20 percent.
While the SEC is fighting the lawsuits, the threat of litigation is clearly carrying weight as the agency moves to finalize Gensler’s agenda. Gensler has often spoken about the importance of ensuring the survival of planned rules, such as on climate risk.
Proposed nearly two years ago, the climate reporting plan would usher in a big shift in corporate disclosures to provide investors with new details about risk. The plan has drawn the ire of several organizations, including the Chamber, which has questioned its details and the SEC’s authority to pursue it. The Chamber recently called it out to reporters as one of two dozen rulemakings to watch in 2024 from federal agencies.
John Coates, who was the SEC’s general counsel for parts of 2021, said the threat of legal challenge should not drive the agency to water down its plans. The SEC should instead focus on regulating within its authority and “don’t not regulate just because you think some judge might have a new take that nobody’s articulated before,” Coates said.
Either way, Wall Street is showing no signs of slowing down.
“The industry almost has a free option at this point that incentivizes them to sue,” Better Markets CEO Dennis Kelleher said. “Worst case, they win by getting substantial delays. Best case, they get a win and a rule is overturned. With these biased courts, there’s little downside.”