Legal attacks are slowing SEC rulemaking in crucial election year

Rulemaking at the US Securities and Exchange Commission, which hit a record pace early in President Joe Biden’s administration, has slowed significantly as the agency navigates a hostile new legal climate. Adverse court decisions over the past two years have blocked the SEC from overseeing the $27 trillion private funds industry; criticized its economic justification for new share buyback disclosures; and curtailed its powers to punish bad actors. The SEC has also been affected by Supreme Court decisions curbing federal agencies’ powers to interpret ambiguous laws or issue rules of major importance.

As a result, SEC officials are rethinking rulemakings and some enforcement actions to help ensure they can survive legal attacks, according to four people familiar with the matter who asked for anonymity to discuss internal SEC issues. SEC Chair Gary Gensler has said the SEC pivots when the courts find against the agency, but the extent to which it is having to adjust is becoming clearer. Reuters identified more than a dozen Gensler-led rules, including on private funds, climate change and diversity, which have been overturned, delayed or which are in doubt due to legal challenges and risks, according to legal experts and an analysis of court filings and the SEC’s public agenda. They show how legal attacks are hindering Wall Street’s watchdog from completing what some regulatory advocates say are important safeguards in a crucial election year that will help define Gensler’s legacy. Republican presidential candidate Donald Trump has pledged to fire Gensler and slash regulations if he wins the election next week.

“When the SEC does act, it’s going to have to work harder to justify its position and it’s going to face more skeptical courts,” said Jill Fisch, a University of Pennsylvania law professor focusing on regulation and capital markets.

“That world is going to limit what any agency chair is going to be able to accomplish.” To be sure, many agencies are under legal attack from conservative and industry groups, and Gensler has notched a couple of notable victories. He has also successfully completed other major rules, including on blank check companies, stock pricing, trade settlements and Treasury markets.

“These are significant reforms in the capital markets and will leave a lasting impact that will enhance capital formation, investor protection, and market efficiency and resilience,” an SEC spokesperson said.

Appointed by Biden and confirmed in 2021, Gensler quickly began implementing an ambitious agenda to boost transparency and stamp out conflicts of interest on Wall Street. In 2022, the agency proposed 30 new rules, the most in any year since the 2008 financial crisis, according to a Reuters tally. As the SEC adopted rules, lawsuits followed. The Chamber of Commerce, Managed Funds Association (MFA) and other groups sued in the conservative-leaning Fifth US Circuit Court of Appeals and elsewhere to overturn at least eight rules, arguing they were unjustified, harmful or beyond the SEC’s authority.

Bryan Corbett, MFA’s CEO, said in a statement the group tried to work with the SEC to improve proposals. “It’s unfortunate we needed to challenge the SEC three times in court before it slowed its harried pace of rulemaking. We hope recent court decisions will lead to more meticulous rulemaking.”

So far, the Fifth Circuit has overturned stock buyback disclosures, saying the agency failed to justify the rule economically, and spiked private funds transparency rules, saying the SEC does not have the authority to oversee that industry.