Disagreements between Democrats and Republicans over the SEC’s role in addressing matters such as climate change, political spending and diversity were highlighted at a congressional hearing on Tuesday.
Members of the Senate Banking Committee gathered virtually to question Gary Gensler and Rohit Chopra as President Joe Biden’s picks to lead the SEC and Consumer Financial Protection Bureau, respectively. Among other things, discussion returned multiple times to materiality and what that means in justifying action by the SEC.
Committee chair Sherrod Brown, D-Ohio, in his opening remarks said that making markets work properly for retail investors and not those ‘looking to game the system’ means ‘upgrading climate-risk disclosure requirements that are out of date, punishing misconduct and enforcing the protections on the books.’
Ranking member Pat Toomey, R-Pennsylvania, used his opening statement to express his fears that regulatory overreach could impose burdens on US companies that will stifle economic recovery. ‘There are some who want the SEC to stray from its tradition of bipartisanship by using its regulatory powers to advance a liberal social and cultural agenda on issues ranging from climate change to racial inequality,’ he said. ‘Based on Mr Gensler’s record, I’m concerned he may be inclined to use the [SEC’s powers] in this inappropriate manner.’
Senator Bill Hagerty, R-Tennessee, later in the hearing echoed Toomey’s position, saying he was concerned by the prospect of regulators advancing social policy ‘via the back door.’ Toomey asked Gensler whether he supported imposing quotas on board composition in terms of race, gender and sexual orientation. ‘I think diversity in boards and senior leadership benefits decision-making,’ Gensler replied, noting that he had committed to pursuing diversity at the SEC.
What is material?
Disclosure of companies’ political spending has become a high-profile issue, particularly since the riot in the US Capitol on January 6. But Toomey argued that political spending by a company typically is an insignificant amount of money compared with its profits, suggesting that it should not be on the table for required corporate disclosure.
Gensler during the hearing said that as SEC chair he would adhere to economic analysis and the US Supreme Court’s view on materiality. The court’s position includes that materiality is determined by what a reasonable investor would take into account as part of the ‘total mix’ of information available when making trading decisions.
On the other side of the argument from Toomey, Senator Robert Menendez, D-New Jersey, noted that more than a million investors and others have asked the SEC to introduce a political spending disclosure rule. Menendez said the number of companies re-evaluating their political spending in the wake of the Capitol riot shows that they recognize its materiality. He added that as a result he would be reintroducing a bill that would require shareholder authorization of certain political expenditures by companies.
Gensler noted the requests for SEC action and said there was widespread support last proxy season for shareholder proposals on political spending disclosure. ‘It is something I think the SEC should consider in light of the strong investor interest,’ he told senators. Similarly, when asked about diversity, he said that at a broader level ‘human capital is a very important part of the value proposition in so many companies’ and that as SEC chair he would look at what investors want.
Materiality was also addressed in terms of climate change. Democratic Senator Elizabeth Warren of Massachusetts asked Gensler: ‘Is there any reason companies should be able to hide their climate risks from investors?’ He responded that there is not, provided the risks are material.
Later in the hearing, Gensler reiterated that investors determine what is material and noted that trillions of dollars have been invested in ways to seek material information about climate risk.