Leaders in public finance are expressing concerns about the rapid pace and extensive scope of rulemaking at the Securities and Exchange Commission (SEC). The SEC is currently developing new regulations for the proposed “consolidated audit trail,” which aims to track transactions more closely, address crypto crackdowns, and enhance climate risk disclosures. These regulations are part of the broader discussion surrounding environmental, social, and governance (ESG) factors, which are increasingly influencing the municipal bond market.
SEC Chairman Gary Gensler emphasized the growing importance of climate risk disclosures in investment decisions during a recent House Financial Services Committee hearing. He noted that issuers are already making such disclosures, and investors are basing their investment choices on them. Gensler also clarified that the SEC does not assess climate risk but remains “merit neutral” regarding ESG claims.
However, Representative Andy Barr from Kentucky disputed Gensler’s claim, suggesting that the real agenda behind these disclosures is to redirect capital away from fossil energy. Barr accused Gensler’s proposal of discriminating against fossil energy.
Gensler’s leadership at the SEC has faced criticism from Congress and municipal leaders, who compare his approach to that of his predecessor, Jay Clayton. Michael Decker, SVP Federal Policy and Research at Bond Dealers of America, stated that the current SEC administration has taken an aggressive stance on regulatory modernization, including in the municipal market.
Under Gensler’s rule, the SEC has implemented a shortened settlement period for most broker-dealer security transactions, reducing credit, market, and liquidity risks. However, the securities industry has strongly criticized these changes, claiming that they threaten market integrity, liquidity, and the savings of American families. Chris Iacovella, President and CEO of the American Securities Association, argued that the rulemaking process lacks proper economic analysis and statutory authority.
During the hearing, Representative Brad Sherman from California provided a dissenting opinion, citing a Bloomberg study that showed Gensler’s SEC producing fewer regulations compared to previous administrations. Sherman defended the SEC’s involvement in the climate change disclosure debate, stating that ESG is material to investors and will impact trillions of dollars in investment decisions.
While current SEC regulations on ESG do not directly affect municipal bonds, experts are monitoring the regulatory process for potential implications in the muni space. The SEC lacks the authority to dictate the content of pre-issuance disclosures by municipal issuers under federal law.
Additionally, the SEC has overseen the controversial Financial Data Transparency Act, which aims to replace PDF documents with machine-readable formats. Many in the municipal world view this rule as an unnecessary and costly solution funded by issuers.
Kenneth E. Bentsen Jr., COO and President of the Securities Industry and Financial Markets Association, highlighted the significant and potentially unknown implications of the SEC’s rapid regulatory changes. Bentsen emphasized the SEC’s responsibility to ensure thoughtful changes that protect the financial system’s health and avoid disproportionate costs.
During the hearing, Democratic members of the committee raised concerns about the impact of a government shutdown on the SEC. Gensler noted that a significant percentage of SEC employees would be furloughed, leaving only a skeletal staff to operate.