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

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.