Finance

SEC Chair Gary Gensler signals that disclosure will be a key issue in the year ahead

Published

9 months ago

April 2, 2024

U.S. Securities and Exchange Commission chairman Gary Gensler testifies during a Senate Banking Committee hearing on Capitol Hill September 12, 2023 in Washington, DC.

Drew Angerer | Getty Images

The annual two-day “SEC Speaks” event kicked off Tuesday, offering clues to what the priorities will be for the Securities and Exchange Commission in the coming year.

Sponsored by the Practicing Law Institute, it is a forum where the SEC provides guidance to the legal community on rules, regulations, enforcement actions and lawsuits. The event allows the SEC to get its main messages across, and this year a key issue is “disclosure.”

“[W]e have an obligation to update the rules of the road, always with an eye toward promoting trust as well as efficiency, competition, and liquidity in the markets,” SEC Chair Gary Gensler said in his introduction to the conference. Besides Gensler, all the SEC division heads and senior staff will be speaking.

Based on Gensler’s introductory remarks, there will be discussions about the upcoming move to shorten the securities settlement cycle from two days to one (T+1, which takes place May 28), the expansion of the definition of an exchange to include more recent trading platforms (like request-for-quote, or RFQ, electronic trading platforms), consideration of a change in the current one-penny increment for quoting stock trades to sub-penny levels, creation of a best execution standard for broker-dealers, and creation of more competition for individual investors orders (so-called payment for order flow).

The SEC’s mission

You often hear SEC officials say the role of the SEC is to “protect investors, maintain fair, orderly and efficient markets, and facilitate capital formation.”

That sounds like a pretty broad mandate, and it is. Deliberately so. It came out of the disaster of the 1929 stock market crash, which was the initial event in the greatest economic catastrophe of the last 100 years: the Great Depression.

Prior to 1933, and particularly in the 1920s, all sorts of securities were sold to the public with wild claims behind them, much of which were fraudulent. After the crash of 1929, Congress went looking for a cause, and fraudulent claims and lack of disclosure were high on the list.

Congress then passed the Securities Act of 1933, and the following year passed the Securities Exchange Act of 1934, which created the SEC to enforce all the new laws. It also required everyone involved in the securities business (mainly brokerage firms and stock exchanges) to register with the SEC.

The 1933 Act did not make it illegal to sell a bad investment. It simply required disclosure: all relevant facts about an investment were supposed to be disclosed, and investors could make up their own minds.

The 1933 Act was the first major federal legislation to regulate the offer and sale of securities in the United States. This was followed by the Investment Company Act of 1940, which regulated mutual funds (and eventually ETFs), and the Investment Advisers Act of 1940, which required investment advisers to register with the SEC.

On the agenda

Tuesday’s conference is a chance for Gensler and his staff to tell everyone what they are doing in greater detail. The agency has six divisions, but they can be boiled down to disclosure, risk monitoring and enforcement.

Risk monitoring. To fulfill its mandate to protect investors, it’s critical to understand what the risks to investors are. There is an economic and risk analysis division that does that.

Disclosure. At the heart of the whole game is disclosure. That is the original requirement of the 1933 Act. The SEC has a division of corporation finance to make sure that Corporate America provides disclosures on issues that could materially affect companies. This starts with an initial public offering and continues when the company becomes publicly traded.

There’s also a division of examinations that conducts the SEC’s National Exam Program. It’s just what it sounds like. The SEC identifies areas of high concern (cybersecurity, crypto, money laundering, climate change, etc.) and then monitors Corporate America (investment advisers, investment companies, broker-dealers, etc.) to make sure they are in compliance with all the required disclosures. Current hot topics include climate change, crypto and cybersecurity.

The problem is that the definition of what should be disclosed has evolved over the decades. For example, there is a bitter legal fight brewing over the recent enactment of regulations requiring companies to disclose climate risks. Many contend this was not part of the original SEC mandate. The SEC disagrees, arguing it is part of the mandate to “protect investors.”

Enforcement. The SEC can use the information they gather to make policy recommendations, and if they feel a company is not in compliance, they can also refer them to the dreaded division of enforcement.

These are the cops. They conduct investigations into securities laws violations, and they prosecute the civil suits in the federal courts. This division will be providing an update on the litigation the SEC is involved in, which is growing.

Mutual funds, ETFs and investment advisers. We’ll also hear from the division that monitor mutual funds and investment advisers. Most people invest in the markets through an investment advisor, and they usually buy mutual funds or ETFs. This is all governed by the Investment Company Act of 1940 and the Investment Advisers Act of 1940. There’s a division of investment management that monitors all the investment companies (that includes mutual funds, money market funds, closed-end funds, and ETFs) and investment advisers. This division will be sharing insights on some of the new disclosure requirements that have been enacted in the past couple years, particularly rules adopted in August 2023 for advisers to private funds.

Trading. Finally, the division of trading and markets monitors everyone involved in trading: broker-dealers, stock exchanges, clearing agencies, etc. We can expect updates on record-keeping requirements, shortening the trading cycle (the U.S. goes to a one-day settlement from a three-day settlement on May 28, which is a big deal), and short sale disclosure.

Did we mention SPACs?

Donald Trump will likely not come up at the conference, but the SEC in January considerably tightened the rules around disclosure of special purpose acquisition companies, or SPACs. Trump’s company, Truth Social, went public on March 22 through a merger with a SPAC known as Digital World Acquisition Corp. It is now trading as Trump Media & Technology (DJT), and it made disclosures Monday that caused the stock to drop about 22%.

Prior to the recent rule changes, executives marketing a company to be acquired by a SPAC often made wild claims about the future profitability of these businesses — claims that would never have been possible to make had a traditional initial public offering route been used. The new SPAC rules that the SEC adopted made the target company legally liable for any statement made about future results by assuming responsibility for disclosures.

Additionally, companies are provided with a “safe harbor” protection when they make forward-looking statements, which provide them with protection against certain legal liabilities. However, IPOs are not afforded this “safe harbor” protection, which is why forward-looking statements in an IPO registration are usually very cautiously worded.

The rules clarified that SPACs also do not have “safe harbor” legal protections for forward-looking statements, which means the companies could more easily be sued.

Like I said, Trump will likely not come up at the conference, but the message: “Disclosure!” will likely be the dominant refrain.

Finance

China self-driving truck company TuSimple pivots to genAI for games

Published

9 hours ago

December 18, 2024

Business Finance News

Workers setting up the TuSimple booth for CES 2022 at the Las Vegas Convention Center on Jan. 3, 2022.

Alex Wong | Getty Images News | Getty Images

Embattled Chinese autonomous trucking company TuSimple has rebranded to CreateAI, focusing on video games and animation, the company announced Thursday.

The news comes as GM folded its Cruise robotaxi business this month, and the once-hot sector of self-driving startups has started to weed out stragglers. TuSimple, which straddled the U.S. and China markets, had its own challenges: concerns over vehicle safety, a $189 million settlement of a securities fraud lawsuit and delisting from the Nasdaq in February.

Now, just over two years after CEO Cheng Lu rejoined the company in the role after being pushed out, he expects the business can break even in 2026.

That’s thanks to a video game based on the hit martial arts novels by Jin Yong that’s slated to release an initial version that year, Cheng said. He anticipates “several hundred million” in revenue in 2027 when the full version is launched.

Before the delisting, TuSimple said it lost $500,000 in the first three quarters of 2023, and spent $164.4 million on research and development during that time.

Company co-founder Mo Chen has a “long history” with the Jin Yong family and started work in 2021 to develop an animated feature based on the stories, Cheng said.

Kunst: AI stocks are cyclical. NVIDIA is the leader, but they will eventually trade down.

The company claims its artificial intelligence capabilities in developing autonomous driving software give it a base from which to develop generative AI. That’s the next-level tech powering OpenAI’s ChatGPT, which generates human-like responses to user prompts.

Along with the CreateAI rebrand, the company debuted its first major AI model called Ruyi, an open-source model for visual work, available via the Hugging Face platform.

“It’s clear our shareholders see the value in this transformation and want to move forward in this direction,” Cheng said. “Our management team and Board of Directors have received overwhelming support from shareholders at the annual meeting.”

He said the company plans to increase headcount to around 500 next year, up from 300.

Cutting production costs by 70%

While still under the name TuSimple, the company in August announced a partnership with Shanghai Three Body Animation to develop the first animated feature film and video game based on the science fiction novel series “The Three-Body Problem.”

The company said at the time that it was launching a new business segment to develop generative AI applications for video games and animation.

CreateAI expects to lower the cost of top-tier, so-called triple A game production by 70% in the next five to six years, Cheng said. He declined to share whether the company was in talks with gaming giant Tencent.

When asked about the impact of U.S. restrictions, Cheng claimed there were no issues and said the company used a mix of China and non-China cloud computing providers.

The U.S. under the Biden administration has ramped up limits on Chinese businesses’ access to advanced semiconductors used to power generative AI.

Finance

Here’s what’s different in the December 2024 statement

Published

12 hours ago

December 18, 2024

Business Finance News

This is a comparison of Wednesday’s Federal Open Market Committee statement with the one issued after the Fed’s previous policymaking meeting in November.

Text removed from the November statement is in red with a horizontal line through the middle.

Text appearing for the first time in the new statement is in red and underlined.

Black text appears in both statements.

Watch Fed Chair Jerome Powell’s press conference here.

Finance

Fed cuts rate by a quarter point

Published

13 hours ago

December 18, 2024

Business Finance News

Federal Reserve cuts rates by 25 basis points

WASHINGTON – The Federal Reserve on Wednesday lowered its key interest rate by a quarter percentage point, the third consecutive reduction and one that came with a cautionary tone about additional reductions in coming years.

In a move widely anticipated by markets, the Federal Open Market Committee cut its overnight borrowing rate to a target range of 4.25%-4.5%, back to the level where it was in December 2022 when rates were on the move higher.

Though there was little intrigue over the decision itself, the main question had been over what the Fed would signal about its future intentions as inflation holds steadily above target and economic growth is fairly solid, conditions that don’t normally coincide with policy easing.

Read what changed in the Fed statement.

In delivering the 25 basis point cut, the Fed indicated that it probably would only lower twice more in 2025, according to the closely watched “dot plot” matrix of individual members’ future rate expectations. The two cuts indicated slice in half the committee’s intentions when the plot was last updated in September.

Assuming quarter-point increments, officials indicated two more cuts in 2026 and another in 2027. Over the longer term, the committee sees the “neutral” funds rate at 3%, 0.1 percentage point higher than the September update as the level has drifted gradually higher this year.

“With today’s action, we have lowered our policy rate by a full percentage point from its peak, and our policy stance is now significantly less restrictive,” Chair Jerome Powell said at his post-meeting news conference. “We can therefore be more cautious as we consider further adjustments to our policy rate.”

Fed Chair Powell calls Wednesday's rate cut a 'closer call' but the 'right call'

“Today was a closer call but we decided it was the right call,” he added.

Stocks sold off following the Fed announcement while Treasury yields jumped. Futures pricing pared back the outlook for cuts in 2025 to one quarter point reduction, according to the CME Group’s FedWatch measure.

“We moved pretty quickly to get to here, and I think going forward obviously we’re moving slower,” Powell said.

For the second consecutive meeting, one FOMC member dissented: Cleveland Fed President Beth Hammack wanted the Fed to maintain the previous rate. Governor Michelle Bowman voted no in November, the first time a governor voted against a rate decision since 2005.

The fed funds rate sets what banks charge each other for overnight lending but also influences a variety of consumer debt such as auto loans, credit cards and mortgages.

The post-meeting statement changed little except for a tweak regarding the “extent and timing” of further rate changes, a slight language change from the November meeting.

Change in economic outlook

The cut came even though the committee jacked up its projection for full-year gross domestic product growth to 2.5%, half a percentage point higher than September. However, in the ensuing years the officials expect GDP to slow down to its long-term projection of 1.8%.

Other changes to the Summary of Economic Projections saw the committee lower its expected unemployment rate this year to 4.2% while headline and core inflation according to the Fed’s preferred gauge also were pushed higher to respective estimates of 2.4% and 2.8%, slightly higher than the September estimate and above the Fed’s 2% goal.

The committee’s decision comes with inflation not only holding above the central bank’s target but also while the economy is projected by the Atlanta Fed to grow at a 3.2% rate in the fourth quarter and the unemployment rate has hovered around 4%.

Though those conditions would be most consistent with the Fed hiking or holding rates in place, officials are wary of keeping rates too high and risking an unnecessary slowdown in the economy. Despite macro data to the contrary, a Fed report earlier this month noted that economic growth had only risen “slightly” in recent weeks, with signs of inflation waning and hiring slowing.

Moreover, the Fed will have to deal with the impact of fiscal policy under President-elect Donald Trump, who has indicated plans for tariffs, tax cuts and mass deportations that all could be inflationary and complicate the central bank’s job.

“We need to take our time, not rush and make a very careful assessment, but only when we’ve actually seen what the policies are and how they’ve been implemented,” Powell said of the Trump plans. “We’re just not at that stage.”

Normalizing policy

Powell has indicated that the rate cuts are an effort to recalibrate policy as it does not need to be as restrictive under the current conditions.

“We think the economy is in really good place. We think policy is in a really good place,” he said Wednesday.

With Wednesday’s move, the Fed will have cut benchmark rates by a full percentage point since September, a month during which it took the unusual step of lowering by a half point. The Fed generally likes to move up or down in smaller quarter-point increments as its weighs the impact of its actions.

Despite the aggressive moves lower, markets have taken the opposite tack.

Mortgage rates and Treasury yields both have risen sharply during the period, possibly indicating that markets do not believe the Fed will be able to cut much more. The policy-sensitive 2-year Treasury yield jumped to 4.3%, putting it above the range of the Fed’s rate.

In related action, the Fed adjusted the rate it pays on its overnight repo facility to the bottom end of the fed funds rate. The so-called ON RPP rate is used as a floor for the funds rate, which had been drifting toward the lower end of the target range.