U.S. capital markets: 2024 and beyond

 
Over the past eight years, the U.S. capital markets have performed well, seemingly unswayed by political and legal/regulatory changes. Under President Trump’s administration, the SEC used the “promotion of capital formation” as a catchphrase and enacted some rules to simplify and modernize disclosure requirements; under President Biden’s administration, the SEC has proposed and enacted several new rules that seem to lean in the direction of greater regulation. However, neither administration has altered the overall regulatory environment for U.S. capital markets in any meaningful way.

Rule changes in the SEC’s Division of Corporation Finance under SEC Commissioner Jay Clayton (a Trump appointee) purporting to “modernize” U.S. disclosure requirements generally took aim at antiquated or fringe disclosure items that did not provide any meaningful information to investors¹. However, there were perhaps two rule changes enacted under Commissioner Clayton that made U.S. offerings marginally easier to do: (1) the financial statement requirements for significant recent and probable acquisitions were scaled back; and (2) the requirements for using finance issuers/subsidiary guarantors for U.S. debt securities were somewhat simplified, by eliminating the need for such disclosures to appear in an issuer’s audited financial statements. It is difficult to attribute any increase in U.S. capital markets transactions to these rule changes alone; if anything, they may have made it a little less expensive for corporate issuers to complete the transactions they would have done regardless.

New rules under SEC Commissioner Gary Gensler (a Biden appointee) tended to focus on previously mandated requirements (e.g., enacting the executive compensation clawback rules that were required under Dodd-Frank) or addressed concerns that were already materially affecting issuers (e.g., cybersecurity). Other rule changes, such as tightened requirements for so-called Rule 10b5-1 plans (similar to automatic share disposition plans in Canada), were intended to promote market fairness rather than affect U.S. capital markets transactions. The more controversial proposed rule changes in Corporation Finance under Commissioner Gensler—relating to share repurchases and climate change disclosures—have been challenged in the U.S. federal courts, and their future under any administration is unclear.

Notwithstanding that both administrations only marginally moved the regulatory needle at the SEC, it may still be tempting to believe that a re-election of President Trump could mean further disclosure reforms, and a victory for the Democratic candidate would mean more new rules and disclosure requirements. However, a recent U.S. Supreme Court decision² may limit the role of presidential politics in SEC rulemaking, as it will make it more difficult for the SEC to enact rule changes in the absence of clear statutory authority from Congress. This decision, handed down on June 28 this year, overturned a 40-year-old precedent of so-called “Chevron deference”³, whereby U.S. courts generally deferred to “permissible” (i.e., reasonable) interpretations by U.S. federal agencies (see more on the overturning of Chevron in our other article “Scaling it back: U.S. Supreme Court continues to curtail U.S. government’s ability to regulate and enforce”). Now, under the new standard, U.S. courts are required to exercise their independent judgment in deciding whether a U.S. federal agency has acted within its statutory authority. This will almost certainly make it impossible for the SEC to enact new share repurchase or climate change disclosure rules without specific legislation by Congress. As a result, the SEC will have much less discretion in driving a policymaking agenda in the form of SEC rulemaking; accordingly, it seems unlikely that the outcome of the next presidential election will meaningfully affect the pace of SEC rulemaking as the next SEC commissioner will be constrained by Loper Bright.

Either way, we have no reason to believe that the outcome of the next election will directly impact the flow of U.S. capital markets in the years to come. It is worth reiterating that the SEC ultimately has no direct control over the success or failure of the markets, other than perhaps by indirectly influencing market participants to play fairly and by the rules. Ultimately, “capital formation” occurs as a result of economic and business factors, and in our experience, the SEC is generally reluctant to stand in the way of the execution of capital markets transactions. The involvement of the SEC’s Division of Corporation Finance in their reviews of IPOs and other capital markets transactions tends to focus on ensuring clarity and consistency in disclosure in an effort to better inform investment decisions by the U.S. public, not to sort out winners and losers.

Instead, as a result of the Supreme Court decision, we can expect that the pace of new or amended U.S. securities laws, rules and regulations will slow down considerably regardless of who is in the White House, as Congress will need to take more specific legislative action (including specific delegation of authority to the SEC to adopt regulations) in order for any such changes to be made. This might not always be a good thing: congressional legislation may miss many of the exceptions and nuances that the SEC would be more likely to remember, such as exceptions for Canadian issuers reporting under the multijurisdictional disclosure system (MJDS). Recently, Congress had proposed to eliminate the foreign private issuer exemption for Section 16 (insider) reporting, without providing an exception for MJDS issuers⁴. This absence of an MJDS exception was probably not intentional, but Congress is less suited to consider such nuances compared to the SEC. It remains to be seen whether Congress will pursue further U.S. securities legislation now that the SEC is more clearly constrained in its rulemaking, but in the event of any new legislation—whether in the area of share repurchases, climate change disclosures or otherwise—it seems possible that statutory ambiguities will arise. Given the need for these ambiguities to be resolved through the courts, this will take much longer to resolve and result in longer periods of uncertainty.