President Biden’s nominee to run the Securities & Exchange Commission had his confirmation hearing with the Senate Banking Committee today, in a session that touched on plenty of subjects — although not too many that are directly relevant to corporate ethics and compliance officers.
The nominee is Gary Gensler, who previously chaired the Commodities & Futures Trading Commission during the Obama Administration and these days is a professor of management at MIT. Gensler also led Biden’s transition team reviewing the SEC and related financial policy agencies, so it’s little surprise that he ended up nominated to run the SEC himself.
The hearing was notable more for what it didn’t cover than it did. Over the course of three hours (Gensler appeared alongside Rohit Chopra, Biden’s nominee to run the Consumer Financial Protection Bureau) we heard nary a peep about:
- Stronger SEC enforcement in corporate misconduct cases
- The rate of IPOs in U.S. capital markets, and whether anything should be done to increase IPOs
- The SEC budget and operations, beyond a promise from Gensler that he’ll be involved in proposals to move the SEC headquarters to a new location in Washington
- Auditing standards and the Public Company Accounting Oversight Board
- The SEC whistleblower awards program, which has been on a tear lately
- Internal control over financial reporting; or how the SEC has been using the ICFR provisions of the Foreign Corrupt Practices Act to press an ever-expanding range of civil enforcement actions
- Special purpose acquisition companies, which are sprouting like weeds and have all sorts of corporate governance concerns
So, um, what did Gensler and senators discuss that might be relevant to compliance officers? Corporate disclosures related to climate change, diversity, and political spending; and whether the SEC has the authority to mandate more such disclosures in corporate securities filings.
The issue is whether those ESG issues meet the legal standard for material items that should be disclosed to investors. Democrats say they do, while Republicans say they don’t. So in today’s hearing we had several Republicans trying to squeeze Gensler on that point, Democrats trying to provide cover for him, and Gensler himself avoiding any statement that might harm his chances at winning confirmation.
The ESG Materiality Fault Line
A typical exchange came from Sen. Pat Toomey, ranking Republican on the Banking Committee. He put the following to Toomey: if a publicly traded firm spends an insignificant amount of money on electricity, “is it material whether that electricity came from renewable sources or not?”
Gensler did his best to dodge that by referring to the Supreme Court’s definition of materiality. Namely, the issue must be “significant to the mix of information to a reasonable investor. That test will always ground our economic analysis and how we move forward on this.”
Of course Toomey disagreed, saying that if something is financially insignificant then it can’t be material. He gave another example: if Apple, which had $274 billion in revenue last year, spent $1 million on political advertising — should that spending be disclosed? Even though the amount is 0.0003 percent of Apple’s revenue?
Gensler’s answer: “Materiality is what reasonable investors are seeking to have to make their decisions either to invest or not to invest; or to vote yes or vote no. In last year’s proxy season, many investors made clear they think that would be material to get such information.”
Toomey kept coming back to financial significance as the basis for materiality; Gensler kept coming back to the Supreme Court’s standard that what’s of interest to investors is the basis of materiality.
Watch for that argument to happen over and over again. Whether we’re talking about disclosures for climate change, workforce diversity, political contributions, or any other ESG issue, the question will always be whether an item that’s financially insignificant can still be ethically or socially significant to enough investors that the SEC should require disclosure. That’s the philosophical debate afoot here.
If you believe the answer is yes — and Gensler does — that opens the door to a wide range of potential new disclosure issues. Climate change is the most immediate example (Gensler said he supports the move from acting chairman Allison Herren Lee to have SEC staff do a review of companies’ current climate change disclosures), but enhanced disclosures related to diversity and political contributions would be the next logical candidates.
Compliance officers would do well to consider how they could implement such disclosure demands into your data collection and reporting regimes. Where would you find a framework for ESG disclosure demands? How would you implement it into your business processes? How would these legally required disclosures overlap with any sustainability reports you’ve been publishing voluntarily? Who would “own” these new disclosure demands — or would they be one more duty tacked on to your job description?
A Word on the Politics
Before we get to any arguments about what policies a Gensler-led SEC should adopt, the guy needs to win Senate confirmation first. Will that happen?
Well, I didn’t hear any Republican senators tearing into Gensler today. Toomey’s sparring over materiality was as close to fireworks as anything we heard, and sparring goes it was pretty tame. Other Republican senators were much more interested in Gensler’s thoughts about cryptocurrency, market structure, and whether day-trading apps like Robinhood are accelerating market volatility to dangerous levels.
That’s also a point worth remembering here: Gensler is immensely well-prepared to confront the governance and market instability questions raised by the next-generation fintech we’re seeing today. Republicans might not agree with him on every issue, but they do know that if they’re going to be stuck with a Democratic SEC chairman, Gensler is a really good one to be stuck with.
As to the Democrats — well, they all praised him. Sen. Elizabeth Warren even had a megawatt grin on her face as she welcomed Gensler and recapped his experience, so clearly he has the progressive flank of the party on his side.
Maybe if Toomey decides to oppose Gensler, other Republicans on the Banking Committee do too, and suddenly Democrats have to force a close vote on the Senate floor where Gensler squeaks by on a 51-50 vote. But that’s the worst possible case, and while I’m not a close observer of nomination politics, I haven’t seen anything to suggest the worst case is coming.