Republican Spending Bill Would Cut SEC Budget, Block Market Structure Proposals

The House Appropriations Committee passed on Thursday, by a voice vote, a spending bill that would block several pending proposals from the Securities and Exchange Commission, including: swing pricing and updates to liquidity management; climate risk and greenhouse gas disclosure; the Safeguarding proposal; and three out of the four market structure proposals from December 2022: the order competition rule, Reg BE and Rule 612 of Reg NMS.

The provisions are part of the appropriations bill funding the federal government’s financial services and general government operations for the fiscal year that begins on October 1.

The would-be blocked proposals closely track a budget request from Representative Patrick McHenry, R-North Carolina, the chairman of the House Committee on Financial Services, who asked in a May letter to the Appropriations Committee that the same proposals be blocked.

Proposals Blocked

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The order competition rule, which would require short auctions for certain retail orders, and Regulation Best Execution, which would move best-execution enforcement to the SEC from the Financial Industry Regulatory Authority, have received widespread criticism from the financial industry. However, reaction to the Rule 612 proposal, which would reduce pricing increments for tick-constrained stocks, has been mostly positive, especially if tick sizes are cut to half-penny increments, as opposed to tenth-of-a-penny increments.

The legislation would also block the swing pricing proposal in its entirety, though only the swing pricing and hard close elements have received widespread pushback. Other elements of the proposal, such as restructuring liquidity categories and increasing the proportion of highly liquid assets a mutual fund must hold in liquid assets from its current 10% of net assets, have not received the same level of public criticism.

The climate risk and greenhouse gas emissions disclosure proposal, which would require issuers to disclose their physical and transitional climate risks, as well as their greenhouse gas consumption, a proposal strongly opposed by Republicans in Congress, would also be blocked.

According to a summary of the legislation published by House Republicans, the climate disclosure is “related to Environment, Social, Governance (ESG) criteria.” Yet the proposal in question does not require or encourage the use of ESG factors. In fact, the text of the rule only references ESG in its text and footnotes in the context of improving the quality and consistency of ESG-related disclosures. The SEC’s proposal stated this is based on investor demand and the interest of investor protection and is intended to provide “reasonable assurance of ESG data.”

The safeguarding proposal, which would update and expand the Custody Rule, would also be prevented by the bill. The SEC was partially motivated by a desire to reign in cryptocurrency platforms, and the motive to block it would seem to be to maintain a more permissive environment for crypto. A summary of the proposal explains that the bill “prohibits the SEC from enforcing the [safeguarding] rule, which states that investment advisers may not be able to rely on crypto platforms as qualified custodians.”

The safeguarding rule would require custodians to segregate their assets from those of their clients, a practice regularly ignored by some crypto platforms.

Spending Cuts

The proposed budget would cut spending by the IRS and SEC, among other agencies.

The SEC’s budget would be cut to $2 billion, which is $170.4 million below 2023 levels. The IRS would also see a cut of $1.081 billion compared to 2023 levels and would be prevented from transferring money from “other IRS accounts” for enforcement purposes.

The additional financing provided by the Inflation Reduction Act to the IRS for enforcement would be clawed back in its entirety, despite President Joe Biden and House Speaker Kevin McCarthy, R-California, previously agreeing on a smaller cut during the debt ceiling negotiations. The proposal summary describes the IRA financing as creating a “supercharged army of 85,000 IRS agents.”

Lastly, the bill aims to end modern teleworking rates and policies at the agencies covered by the bill, which include the SEC, IRS, Consumer Finance Protection Bureau and the Small Business Administration. The bill reads, “none of the funds made available by this or any other Act may be obligated or expended until each agency reinstates and applies the telework policies, practices and levels of the agency as in effect on December 31, 2019.”

House Republicans in past hearings have been sharply critical of SEC Chair Gary Gensler and the SEC’s relatively high turnover rates. Removing teleworking, a valuable retention tool, would likely only serve to aggravate this problem and increase the SEC’s recruitment and training costs.

It is not settled when the full House will consider this measure, or when it would move to the Senate and whether the 13 individual appropriations bills for fiscal 2024 will be considered separately or as part of a broad omnibus appropriations measure, as has happened several times in recent years.

Tags: Climate Risk, cryptocurrency exchange, ESG, Gary Gensler, Inflation Reduction Act of 2022, SEC, swing pricing

It’s no secret that COVID-19 disrupted the economy, hastening trends that were already building. But what companies stand to come out ahead long-term as a result of the pandemic-induced changes—and should be good bets for investors?

The answer: businesses that positioned themselves to benefit from the movement to the cloud and those that harnessed new technology to achieve better pricing power. This is the conclusion from a broad study of how the pandemic altered the economy by J.P. Morgan Asset Management. The principal beneficiaries, it predicts, range from tech giant Microsoft to farm equipment maker John Deere.

The report, “The Post-COVID World Comes Into Focus,” outlines how government fiscal outlays have expanded, moving the U.S. and other nations into an industrial policy previously shunned (example: Washington’s huge new program to boost domestic chip production). Other changes: a “re-wiring” of international trade toward a multi-polar system to minimize China’s influence and aging populations in developed countries that hasten dependence on new technology to overcome labor shortages.

“Government is playing a more critical role in the economy” than before, says the study’s main author, Jared Gross, the firm’s head of institutional portfolio strategy, in an interview. The U.S. economy has evolved so that there now is a “fiscal put,” with the federal government surpassing the Federal Reserve’s prominence, born of the need for government outlays to combat the pandemic, he says.

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Nonetheless, he adds, the government’s industrial policy “is not picking winners at the company level,” but rather altering the landscape via subsidies and tax breaks so that the strongest players emerging from the virus’ economic disruption can grow even more important in the future.

What might some of those well-positioned companies be?

The study highlights Microsoft for its strong position in cloud computing. Second only to Amazon, Microsoft’s cloud revenue has been expanding more quickly than the e-commerce megalith since the pandemic’s onset. Cloud infrastructure—computing, networking and storage—monetizes data, the amount of which doubles globally every 18 to 24 months, the report notes. “Data growth is not constrained” as are volumes of physical goods such as TVs and smartphones, Gross observes.

Artificial intelligence is another of Microsoft’s advantages, the report found. The company is the lead investor in OpenAI, the developer of the top generative AI app.

Another company on JPM’s winners’ list is Infosys, an Indian IT service provider. “It facilitates the transition” of businesses to the cloud and other digital services, Gross says. Revenue growth was between 5% and 10% annually before COVID, then ballooned to 20% before falling back to its current 15%.

A third leader whose tech prowess has catapulted its revenue is Mercado Libre Inc., the biggest e-retailer in Latin America, which was founded in 1999 in Argentina and now has offices throughout South and Central America. “They have first-mover advantage there,” Gross says, comparing its rise to that of Amazon. The company continually adds more capabilities, including advertising and lending.

The JPM study also spotlighted two other companies that have used technology to spring-load their returns: Old Dominion Freight Line, which specializes in small-quantity shipments (known as less-than-truckload), and Deere & Co., doing business as John Deere, the farm-equipment maker. Old Dominion has honed its logistical expertise and so has been able to escalate its prices. Deere has also improved its pricing power by furnishing farmers with data on where and how to plant their crops to get better yields.

Since pandemic lows in early 2020, these five companies have enjoyed rapid stock appreciation, doubling or tripling. Those performances beat that of the S&P 500, up 1.7 times since then.

To Gross, “These companies have better positioning and will see higher revenue and profitability.”