Capital Markets: Overview and Selected Policy Issues in the 118th Congress

Capital Markets: Overview and Selected Policy Issues in the 118th Congress

Capital Markets: Overview and Selected Policy March 9, 2023
Issues in the 118th Congress
Eva Su, Coordinator
Capital markets are part of the financial system where entities raise funding from investors by
Analyst in Financial
dealing in stocks, bonds, digital asset securities, and other investments. As a main segment of the
Economics
financial system, capital markets provide the largest sources of financing for U.S. nonfinancial

companies. Securities issuers, intermediaries, and investors are all active participants in capital
Gary Shorter
markets. The U.S. capital markets measure over $100 trillion in size, composed of about $52
Specialist in Financial
trillion in equity and $49 trillion in fixed income as of 2021. Market participants include about
Economics
7,400 reporting companies, 4,000 publicly traded companies, 28,000 registered entities, 24

national securities exchanges, nine credit rating agencies, and seven active registered clearing
agencies. The Securities and Exchange Commission (SEC) is the primary regulator overseeing
Jay B. Sykes
capital markets. Capital market operations and regulation can be organized into several main
Legislative Attorney
components, including

Rena S. Miller
Securities offerings. Over the past decade, companies have raised more funds through private
Specialist in Financial
securities offerings than through public offerings such as initial public offerings (IPOs).
Economics
Policymakers are concerned about market transparency and equal access to investment

opportunities in private securities markets.
John J. Topoleski
Specialist in Income
Securities trading and market structure. Several developments in trading markets have also
Security
attracted the attention of policymakers. The SEC has scrutinized potential conflicts of interest,

market competition, and market transparency issues raised by “payment for order flow,” a
practice whereby market makers pay brokers for the ability to execute retail client stock trades.

Policymakers are also analyzing disruptions in the market for U.S. Treasury securities and
evaluating options for enhancing market resilience.
Investment management. Some policymakers are concerned about financial stability risks in the investment management
industry, including the perceived structural vulnerabilities surrounding money market mutual funds. Policymakers are also
concerned about several issues involving private funds, including transparency, investor access, investor protection, and
stakeholder perspectives.
Investment advisory services. Retail investors commonly use investment advisory services to help them meet their
investment goals. As a result, they can be harmed when persons who provide such services face conflicts of interest. To
address these concerns, the SEC and Department of Labor have established standards of care for broker-dealers, investment
firms, and retirement accounts.
Environmental, social, and governance (ESG) investing. Investors have shown increasing interest in companies and funds
that focus on ESG standards. The SEC has pursued related issues through proposed rules regarding climate disclosures by
operating company issuers and the naming and disclosure requirements for certain investment companies.
Digital assets. The regulation of digital assets continues to occupy the attention of legislators, regulators, and the public.
While the SEC has used its existing authorities to combat fraud and unregistered securities offerings involving digital assets,
some commentators have highlighted gaps in the regulatory framework for digital assets that do not qualify as securities.
Capital markets volatility and market-driven events. Market volatility could warrant policy attention when it reveals
structural vulnerabilities. During such episodes, Congress and the SEC have implemented several measures to ease extreme
market conditions.
SEC agency operations and rulemaking. In 2021, Gary Gensler was confirmed as chair of the SEC. Since assuming office,
Chair Gensler has pursued dozens of rulemakings. Some policymakers have raised concerns regarding the pace of the SEC’s
rulemaking and whether the agency has provided sufficient time for stakeholders to comment on key changes.
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Contents
Introduction ..................................................................................................................................... 1
Background ..................................................................................................................................... 2
Market Composition and Key Players ...................................................................................... 2
Fundamental Concepts .............................................................................................................. 3
Regulatory Architecture ............................................................................................................ 4
Policy Issues by Market and Regulatory Components .................................................................... 5
Securities Offerings ................................................................................................................... 6
Policy Issue: Growth of Private Securities Markets ........................................................... 6
Policy Issue: Special Purpose Acquisition Companies (SPACs) ........................................ 8
Securities Trading and Market Structure .................................................................................. 11
Policy Issue: Payment for Order Flow .............................................................................. 12
Policy Issue: Treasury Market Disruptions ....................................................................... 14
Investment Management ......................................................................................................... 17
Policy Issue: Money Market Mutual Funds (MMFs) ....................................................... 19
Policy Issue: Private Equity .............................................................................................. 21
Investment Advisory Services ................................................................................................. 23
Policy Issue: Broker-Dealers and Registered Investment Advisors—SEC
Fiduciary and Best Interest Standards ........................................................................... 25
Policy Issue: Pension and Retirement Accounts—DOL Fiduciary Standards .................. 28
Environmental, Social, and Governance (ESG) Investing ...................................................... 30
Policy Issue: The SEC’s Proposed Climate Disclosure Rule ............................................ 31
Policy Issue: Investment Manager ESG Compliance ....................................................... 35
Digital Assets .......................................................................................................................... 37
Policy Issue: SEC Digital Asset Jurisdiction .................................................................... 38
Policy Issue: Stablecoins................................................................................................... 41
Capital Market Volatility and Market-Driven Events ............................................................. 43
Policy Issue: Tools to Ease Extreme Market Conditions .................................................. 44
SEC Agency Operations .......................................................................................................... 46
Policy Issue: SEC Rulemaking Agenda Under Chair Gensler .......................................... 48

Figures
Figure 1. Capital Markets Financing for Nonfinancial Firms Compared with Other
Funding Sources ........................................................................................................................... 1
Figure 2. Domestic Publicly Listed Companies: Number and Market Capitalization .................... 7
Figure 3. Quarterly SPAC and Traditional IPO Deal Count ............................................................ 9
Figure 4. Equity Market Structure .................................................................................................. 11
Figure 5. The Importance of Financial Advice, Counseling, and Education ................................. 24
Figure 6. Global ESG Investing Adoption Levels ......................................................................... 31
Figure 7. Modeled Market Volatility (VIX Index) over a Century ................................................ 44
Figure 8. SEC Organizational Chart .............................................................................................. 48
Figure 9. Rules Proposed or Finalized by SEC Chairs .................................................................. 49

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Tables
Table 1. Public and Private Funds Net Asset Value as of 2021 ($Billions) ................................... 18

Contacts
Author Information ........................................................................................................................ 51

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Capital Markets: Overview and Selected Policy Issues

Introduction
Capital markets are the part of a financial system where entities raise funding from investors by
dealing in stocks, bonds, digital asset securities, and other investments. Capital markets
instruments (securities) include (1) stocks, also called equity or shares, referring to ownership of a
firm; (2) bonds, also called fixed income or debt securities, referring to the indebtedness or
creditorship of a firm or a government entity; (3) digital asset securities, referring to digital
representations of value in securities form; and (4) shares of investment funds, which are pooled
investment vehicles that consolidate money from individual and institutional investors.1
As a main segment of the U.S. financial system, capital markets provide the largest sources of
financing for U.S. nonfinancial companies.2 U.S. capital markets offer around 76% of the
financing for nonfinancial firms (Figure 1).3 By contrast, capital markets play a less prominent
role in other major economies, such as Japan, the Eurozone, and the United Kingdom.4
Figure 1. Capital Markets Financing for Nonfinancial Firms Compared with Other
Funding Sources

Source: CRS, using data from SIFMA.
Notes: Data as of 2021. Eurozone = 19 EU-member states using the euro. Other = insurance reserves, trade
credits, and trade advances.
Capital markets have continuously drawn policy attention, especially with regard to capital
formation, investor protection, and efficient market operations. In recent Congresses, some
capital markets legislative proposals, such as those that would amend the Jumpstart Our Business
Startups Act (JOBS Act; P.L. 112-106), have evolved through multiple iterations.5 Members of

1 For more on the definition of security, see SEC Division of Corporate Finance Director William Hinman, “Digital
Asset Transactions: When Howey Met Gary (Plastic),” speech delivered at Yahoo Finance All Markets Summit:
Crypto, San Francisco, CA, June 14, 2018, https://www.sec.gov/news/speech/speech-hinman-061418.
2 The calculation excludes financial firms, because the financial services sector focuses on asset allocation instead of
the production of tangible goods.
3 Securities Industry and Financial Markets Association (SIFMA), 2022 Capital Markets Fact Book, July 2022,
https://www.sifma.org/wp-content/uploads/2022/07/CM-Fact-Book-2022-SIFMA.pdf.
4 SIFMA, 2022 Capital Markets Fact Book.
5 In 2012, the bipartisan Jumpstart Our Business Startups Act (JOBS Act; P.L. 112-106) established several new
options for fundraising. Starting in 2015, parts of the Fixing America’s Surface Transportation Act (P.L. 114-94)—
referred to as JOBS Act 2.0—provided additional regulatory amendments for smaller companies. Following the JOBS
Act and JOBS Act 2.0, Congress has considered numerous legislative proposals, building on existing JOBS Act
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Capital Markets: Overview and Selected Policy Issues

Congress have also introduced numerous standalone proposals targeting (1) securities offerings;
(2) asset management; (3) investment advisers; (4) trading and market structure; (5)
environmental, social, and corporate governance issues; (6) crypto and digital asset securities; and
(7) Securities and Exchange Commission (SEC) operations. This report covers each of these
seven selected policy areas in more detail.
The report starts with general background on capital markets operations and regulatory
frameworks. It then examines prominent policy issues pertaining to the seven categories listed
above. Selected SEC rulemakings or other proposed legislative or regulatory changes that may be
of interest to Congress are described throughout the report. These issues serve as examples of
policy debates. They are not exhaustive of all capital markets policy issues.
Background6
Capital markets involve many participants and operational components. The related activities face
layers of securities regulation implemented by multiple regulatory bodies.
Market Composition and Key Players
Securities issuers, intermediaries, and investors are the main categories of participants in capital
markets. Issuers include companies raising funding, the federal government, and municipalities
that issue securities for fundraising purposes. Intermediaries such as broker-dealers, investment
companies (e.g., mutual funds, private equity funds, and hedge funds), investment advisers, and
securities exchanges facilitate the flow of capital from institutional and retail investors to
securities issuers.
The U.S. capital markets measure over $100 trillion in size, composed of about $52 trillion in
equity and $49 trillion in fixed income as of 2021.7 At approximately 40% of the global equity
and fixed income markets, U.S. capital markets are the largest and most relied-upon in the world.
Market participants include about 7,400 reporting companies, 4,000 publicly traded companies,
28,000 registered entities, 24 national securities exchanges, nine credit rating agencies, and seven
active registered clearing agencies.8 Registered market participants include investment advisers,
broker-dealers, mutual funds, exchange-traded funds, municipal advisers, and transfer agents.9
These entities employ an estimated 940,000 individuals in the United States.10

provisions, including the JOBS and Investor Confidence Act of 2018 (House-amended S. 488 in the 115th Congress;
JOBS Act 3.0)—a capital markets package of 32 proposals that passed House by a 406-4 vote in 2018. Around the 10th
anniversary of the JOBS Act, some Members of Congress introduced another capital markets draft legislation package
referred to as the JOBS Act 4.0 that included some JOBS Act 3.0 proposals as well as other proposed amendments to
capital markets regulation.
6 Authored by Eva Su, except for the “Regulatory Architecture” section, which is authored by Jay Sykes.
7 SIFMA, 2022 Capital Markets Fact Book. Also see SEC Chair Gary Gensler, Testimony Before the United States
Senate Committee on Banking, Housing, and Urban Affairs, September 15, 2022, https://www.sec.gov/news/testimony/
gensler-testimony-housing-urban-affairs-091522. Note that market size fluctuates depending on market conditions.
8 SEC, Fiscal Year 2022 Congressional Budget Justification Annual Performance Plan, https://www.sec.gov/files/fy-
2022-congressional-budget-justification-annual-performance-plan_final.pdf.
9 Most of these participants are discussed throughout this report. For more on transfer agents, see SEC, Transfer
Agents, at https://www.sec.gov/divisions/marketreg/mrtransfer.shtml.
10 SEC, Strategic Plan Fiscal Years 2018-2022, at https://www.sec.gov/files/SEC_Strategic_Plan_FY18-
FY22_FINAL.pdf.
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The SEC is the primary regulator overseeing capital markets. Aside from regulating market
participants, the agency oversees other regulatory bodies, such as the Financial Industry
Regulatory Authority (FINRA), the Municipal Securities Rulemaking Board (MSRB), the
Securities Investor Protection Corporation, the Public Company Accounting Oversight Board, and
the Financial Accounting Standards Board. With regard to broader marketplace regulation, the
SEC coordinates with the Commodity Futures Trading Commission (CFTC), a separate federal
financial regulator overseeing derivatives and commodities markets, regarding issues involving
securities-based derivatives.11
State securities regulators also play a role in regulating intra-state securities markets.12 While
federal law preempts some categories of state securities regulation , certain areas—such as fraud
and the regulation of small investment advisers—remain within the purview of state securities
regulators.
Fundamental Concepts
This section provides conceptual background for understanding capital market operational
practices and their regulation.
 Regulatory philosophy. The SEC is principally concerned with disclosure and
transparency on the theory that investors should have sufficient information to
make informed investment decisions.13 The SEC’s regulatory philosophy is
different from that of banking regulators, which focus primarily on safety and
soundness.14 This difference occurs in part because of the federal government’s
role as an insurer of bank deposits. In capital markets, by contrast, investors
generally assume the risk of loss.
 Public and private securities offerings. The SEC requires that offers and sales
of securities, such as stocks and bonds, be either registered with the SEC or
undertaken pursuant to a specific exemption.15 The goal of registration is to
ensure that investors receive key information on the securities being offered.
Registered offerings, often called public offerings, are available to all types of
investors. By contrast, securities offerings that are exempt from registration
requirements are referred to as private offerings or private placements. Private
offerings are available to institutions or individual investors who meet certain net
worth or income thresholds, in addition to individuals who possess certain
indications of technical expertise.
 Retail and institutional investors. Investors are often divided into retail
investors (individuals and households) and institutional investors. Retail and
institutional investors are generally perceived by stakeholders as having different
capabilities to process information, comprehend investment risks, and sustain

11 CFTC, “The Commission,” https://www.cftc.gov/About/AboutTheCommission.
12 SEC, “State Securities Regulators,” https://www.investor.gov/introduction-investing/investing-basics/glossary/state-
securities-regulators.
13 For more details on securities disclosure and transparency, see CRS In Focus IF11256, SEC Securities Disclosure:
Background and Policy Issues, by Eva Su.
14 Federal Reserve Bank of Chicago, “Safety and Soundness,” https://www.chicagofed.org/banking/banker-resources/
safety-and-soundness.
15 SEC, “Registration Under the Securities Act of 1933,” https://www.investor.gov/introduction-investing/investing-
basics/glossary/registration-under-securities-act-1933.
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financial losses. In general, retail investors are thought to warrant more
protection from inadequate disclosure than institutional investors.
 Primary and secondary markets. The primary markets are where securities are
originally issued through public and private securities offerings.16 The secondary
markets are where securities are traded to provide liquidity for existing securities.
Liquidity is a common term that measures how quickly and easily transactions
can occur without affecting an asset’s price. Certain trading venues—for
example, national securities exchanges and alternative trading systems—are
essential enablers of secondary market trading and liquidity, which are important
to the markets’ overall health and efficiency.
 Capital formation and investor protection. Investor protection and capital
formation are two of the SEC’s core missions.17 Some observers believe that the
two goals stand in some tension. They argue that “light touch” regulation
promotes capital formation by lowering firms’ compliance costs, potentially at
the expense of investor protection.18 Others, however, have argued that the
perceived tradeoff between the SEC’s capital formation and investor protection
goals is less stark, because robust investor protection induces greater
participation in securities markets, which in turn lowers the cost of capital.19
Regulatory Architecture20
The regulatory framework governing the securities markets consists of several components.
First, as discussed, the SEC is the primary securities regulator and has broad authority over
securities issuers, intermediaries, trading venues, and various participants in the securities
industry.21
Second, the SEC oversees several self-regulatory organizations (SROs), which exercise front-line
responsibility for regulating specific categories of market participants.22 SROs in the securities
industry include national securities exchanges;23 FINRA, which regulates broker-dealers as the

16 For more on primary and secondary markets, see Corporate Finance Institute, “Primary Market,” December 7, 2022,
https://corporatefinanceinstitute.com/resources/wealth-management/primary-market.
17 SEC, “The Role of the SEC,” https://www.investor.gov/introduction-investing/investing-basics/role-sec.
18 For example, Mark Lebovitch and Jacob Spaid, “In Corporations We Trust: Ongoing Deregulation and Government
Protections,” Harvard Law School Forum on Corporate Governance, February 6, 2019,
https://corpgov.law.harvard.edu/2019/02/06/in-corporations-we-trust-ongoing-deregulation-and-government-
protections.
19 For example, see former SEC Commissioner Luis Aguilar, “Capital Formation from the Investor’s Perspective,”
December 3, 2012, https://www.sec.gov/news/speech/2012-spch120312laahtm.
20 Authored by Jay Sykes.
21 See generally LOUIS LOSS, JOEL SELIGMAN & TROY PAREDES, SECURITIES REGULATION (6th ed. 2020). The
Department of Justice also enforces laws pertaining to securities markets through its prosecution of criminal securities
fraud. See Securities and Commodities Fraud, DEP’T OF JUSTICE (updated Sept. 26, 2022), https://www.justice.gov/
criminal-fraud/securities-and-commodities-fraud.
22 For more detailed discussions of the role that SROs play in the securities industry, see William A. Birdthistle & M.
Todd Henderson, Becoming a Fifth Branch, 99 CORNELL L. REV. 1 (2013); Saule T. Omarova, Rethinking the Future of
Self-Regulation in the Financial Industry, 35 BROOK. J. INT’L L. 665 (2010); Roberta S. Karmel, Should Securities
Industry Self-Regulatory Organizations Be Considered Government Agencies? 14 STAN. J.L. BUS. & FIN. 151 (2008).
23 15 U.S.C. § 78f.
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only registered national securities association;24 MSRB, which regulates municipal securities
dealers and municipal advisors;25 and clearing agencies.26
While the securities laws have outsourced certain rulemaking and enforcement activities to these
SROs, the SEC retains the authority to approve or reject SRO rules, examine SROs to ensure they
are discharging their responsibilities, and bring disciplinary actions against SROs for securities
law violations.27
Third, the federal securities laws include a robust private remedial system in which investors can
recover for losses caused by fraud and other wrongful conduct.28 Private plaintiffs file hundreds
of securities class actions each year.29 In one popular metaphor, their attorneys represent “private
attorneys general” who fill gaps in public law enforcement.30
Fourth, state securities regulators play a role in regulating the securities markets by enforcing
what are colloquially known as “blue sky” laws.31 While the National Securities Markets
Improvement Act of 1996 preempted large portions of state securities-offering regulation,32 state
authorities retain a key role in policing securities fraud in addition to misconduct by broker-
dealers and small investment advisers.33
Policy Issues by Market and Regulatory
Components
As previously mentioned, capital markets policy debates involve several main issue categories,
including (1) securities offerings; (2) asset management; (3) investment advisers; (4) trading and
market structure; (5) environmental, social, and corporate governance issues; (6) crypto and
digital asset securities; and (7) SEC agency operations.34 This section provides an overview of
key policy issues in each category.

24 Id. § 78o-3.
25 Id. § 78o-4.
26 Id. § 78q-1.
27 Id. § 78s.
28 See, e.g., 15 U.S.C. § 77k (prohibiting false statements in registration statements); id. § 78j(b) (prohibiting fraud in
connection with the purchase or sale of securities in contravention of SEC rules); 17 C.F.R. § 240.10b-5 (prohibiting
fraud in connection with the purchase or sale of securities).
29 See Janeen McIntosh & Svetlana Starykh, Recent Trends in Securities Class Action Litigation: 2021 Full Year
Review, NERA ECONOMIC CONSULTING (Jan. 25, 2022), https://www.nera.com/content/dam/nera/publications/2022/
PUB_2021_Full-Year_Trends_012022.pdf.
30 Judge Jerome Frank coined the term private attorney general in Associated Industries of New York State, Inc. v.
Ickes, 134 F.2d 694, 704 (2d Cir. 1943).
31 Blue Sky Laws, SEC. AND EXCH. COMM’N, https://www.investor.gov/introduction-investing/investing-basics/glossary/
blue-sky-laws (last visited Dec. 9, 2022).
32 P.L. 104-290, 110 Stat. 3416 (1996).
33 Andrew K. Jennings, State Securities Enforcement, 47 BYU L. REV. 67, 77-78 (2021).
34 Some of these categories may not be mutually exclusive.
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Securities Offerings
Companies turn to capital markets to raise funds from investors, a process referred to as a
securities offering.35 The companies that offer securities in exchange for funding are referred to as
securities issuers. There are two main types of securities offerings. Public securities offerings are
open to a wide range of investors (allowing a company to potentially raise more money from a
larger investor pool) but must meet comprehensive registration and disclosure requirements,
which may result in greater regulatory costs. By contrast, private securities offerings are exempt
from certain SEC registration requirements but are generally available only to investors who are
perceived as more sophisticated and able to sustain financial losses. Hence, securities regulation
allows for wider or narrower access to investors and investment opportunities based on the
amount of issuer disclosure and compliance.
Policy Issue: Growth of Private Securities Markets
Over the past decade, private securities offerings have eclipsed public offerings in volume.36 The
SEC estimates that between July 1, 2021, and June 30, 2022, issuers raised around $4.4 trillion in
private offerings, almost four times the amount ($1.2 trillion) raised in public offerings.37 In the
previous year, private and public offerings were at $3.3 trillion and $1.7 trillion, respectively.38
Accompanying this trend is the decline in the number of publicly traded companies—a shift that
suggests that public offerings may be growing less attractive or necessary for certain types of
firms. While the number of publicly traded companies has declined, their market capitalization
has increased (Figure 2).

35 For more on securities offerings, see CRS Report R45221, Capital Markets, Securities Offerings, and Related Policy
Issues, by Eva Su.
36 See SEC, Concept Release on Harmonization of Securities Offering Exemptions, June 18, 2019, Figure 1,
https://www.sec.gov/rules/concept/2019/33-10649.pdf; and SEC, “SEC Seeks Public Comment on Ways to Harmonize
Private Securities Offering Exemptions,” press release, June 18, 2019, https://www.sec.gov/news/press-release/2019-
97.
37 SEC, Office of the Advocate for Small Business Capital Formation, Annual Report: Fiscal Year 2022,
https://www.sec.gov/files/2022-oasb-annual-report.pdf.
38 SEC, Office of the Advocate for Small Business Capital Formation Annual Report: Fiscal Year 2022.
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Figure 2. Domestic Publicly Listed Companies: Number and Market Capitalization

Source: SEC, Office of the Advocate for Small Business Capital Formation, Annual Report: Fiscal Year 2021,
https://www.sec.gov/files/2021-OASB-Annual-Report.pdf.
The policy debate surrounding private securities offerings is an illustration of the potential
tradeoffs between investor protection and capital formation. The less onerous requirements of
private offerings may facilitate capital formation by allowing issuers to raise funds more easily.
On the other hand, the absence of rigorous disclosure requirements for private offerings may raise
investor protection concerns. For example, less sophisticated retail investors may be unable to
comprehend the higher risks that often accompany unregistered private offerings.
The increased importance of private securities offerings also represents a regulatory shift from a
“one size fits all” regulatory approach, where public securities offerings were the dominant option
for all issuers, to a broader selection of approaches applied to different fundraising methods.
Additional regulatory options created through the private securities offerings process include
more tailored regulations to account for factors such as the size of a firm’s fundraising needs, the
relevant industry (e.g., crowdfunding), scaled disclosure requirements, and investment limits to
different types of investors when determining if the issuers are eligible for private offerings.
Some commentators have argued in favor of expanding access to private securities offerings
based on principles of equal access.39 As private markets continue to grow, some believe that
investors may enjoy diversification benefits from allocating capital across the whole universe of
public and private securities. In other words, this point of view reflects a belief that if retail
investors cannot access a significant portion of investable assets, it is difficult for them to gain
full exposure to the broader marketplace. In addition, while private markets may be riskier than
public markets, they may also offer higher prospective nominal returns.

39 SEC, Small Business Capital Formation Advisory Committee, Expanding Retail Access to Private Markets,
November 2019, https://www.sec.gov/spotlight/sbcfac/expanding-retail-access-to-private-markets-finley.pdf.
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Other commentators have expressed skepticism about the growth of private markets.40 For
example, some observers are concerned about investor protection and the lack of transparency in
private securities offerings. Some argue that the expansion of private markets is attributable to
deregulatory policy choices over the past decade, as opposed to organic growth.41 They believe
that the opacity of private securities markets could pose risks related to market disruptions and
misallocation of capital.42
For Further Information
For questions about private securities offerings, contact Eva Su, Analyst in Financial Economics.
Additional reading on private and public securities offerings is available in:
CRS Report R45221, Capital Markets, Securities Offerings, and Related Policy Issues, by Eva Su
CRS In Focus IF10747, Private Securities Offerings: Background and Legislation, by Eva Su
CRS In Focus IF11278, Accredited Investor Definition and Private Securities Markets, by Eva Su
CRS In Focus IF10855, Capital Access: IPO and “IPO On-Ramp”, by Eva Su
CRS In Focus IF10848, Capital Access: SEC Regulation A+ (“Mini-IPO”), by Eva Su
Policy Issue: Special Purpose Acquisition Companies (SPACs)
A SPAC is a type of company that raises capital through an initial public offering (IPO) with the
intention to use the proceeds to acquire other existing, operating companies at a later time.
Because the investors often do not know exactly what company or companies their money will be
used to buy, SPACs are sometimes referred to as “blank check” companies. Unlike traditional
IPOs, which offer extensive upfront disclosures about the operating companies,43 SPACs do not
have commercial operations at the time of the IPOs. SPACs first appeared in the 1980s but have
gained popularity in recent years, especially since 2020. The IPO deal count for SPACs reached a
record high in 2021,44 substantially surpassing traditional IPOs. However, SPAC offerings
subsided in 2022 (Figure 3).45

40 Former SEC Commissioner Allison Lee, “Going Dark: The Growth of Private Markets and the Impact on Investors
and the Economy,” October 12, 2021, https://www.sec.gov/news/speech/lee-sec-speaks-2021-10-12.
41 Lee, “Going Dark.”
42 Lee, “Going Dark.”
43 SEC, Investor Bulletin: Investing in an IPO, https://www.sec.gov/investor/alerts/ipo-investorbulletin.pdf; and
Latham and Watkins, US IPO Guide, June 15, 2022, https://www.lw.com/admin/upload/SiteAttachments/lw-us-ipo-
guide.pdf.
44 Max Bazerman and Paresh Patel, “SPACs: What You Need to Know,” Harvard Business Review, July-August 2021,
https://hbr.org/2021/07/spacs-what-you-need-to-know.
45 Preston Brewer, “IPOs Fall to Earth; a Requiem for SPACs?,” Bloomberg Law, July 8, 2022,
https://news.bloomberglaw.com/bloomberg-law-analysis/analysis-ipos-fall-to-earth-a-requiem-for-spacs; and Aziz
Sunderji and Amrith Ramkumar, “SPAC Activity in July Reached the Lowest Levels in Five Years,” Wall Street
Journal, August 17, 2022, https://www.wsj.com/articles/spac-activity-in-july-reached-the-lowest-levels-in-five-years-
11660691758.
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Figure 3. Quarterly SPAC and Traditional IPO Deal Count

Source: Bloomberg.
Note: Deals include IPOs of at least $1 mil ion priced on U.S. exchanges.
SPACs-related policy issues include
 Regulatory treatment. As SPACs grew from a market niche to a popular
alternative to traditional IPOs within a short period of time, questions arose
regarding equitable regulatory treatment. Many market participants view SPACs
as a “backdoor” to a public listing,46 because such offerings have fewer upfront
disclosure requirements and can be completed more quickly than a traditional
IPO.
 Investor protection. SPAC investors purchase their shares without knowing the
specifics of a SPAC’s future target company. If investors do not like the proposed
acquisition, they can get their money back during the so-called de-SPAC process
(when the SPAC acquires a target operating company). Despite the availability of
the de-SPAC process, SPAC critics are concerned that a lack of transparency
surrounding such offerings could be risky for investors. In particular, critics have
noted that many SPACs have been associated with fraud and manipulation.47
 Performance relative to traditional IPOs. SPACs in general have a reputation
for underperforming traditional IPOs and other market benchmarks.48 Some
academic research shows that, while public market SPAC investors may have
suffered losses or low returns, SPAC sponsors (who create the SPACs) realized
high average annualized returns on their initial investments.49
 Incentive structure. SPAC sponsors’ compensation (also called a “promote”) is
typically high and not contingent upon meeting financial targets.50 Some believe

46 Kuo-Hua Fan, “What Are the Similarities and Differences Between SPAC and Backdoor Listing?” Lexology,
https://www.lexology.com/library/detail.aspx?g=518725a9-94b7-4b63-8cb5-9b955a1cd321.
47 For example, report by Office of Senator Elizabeth Warren, The SPAC Hack: How SPACs Tilt the Playing Field and
Enrich Wall Street Insiders, May 2022, https://www.warren.senate.gov/imo/media/doc/SPACS.pdf.
48 Noah Buhayar, Tom Maloney, and Zijia Song, “Wall Street Is Churning Out SPACs at Investors’ Peril,” Bloomberg,
November 16, 2021, https://www.bloomberg.com/graphics/2021-what-is-a-spac-wall-street-investor-risk.
49 Jay Ritter et al., “SPACs,” Review of Financial Studies, October 12, 2022, https://ssrn.com/abstract=3775847.
50 Ramey Layne and Brenda Lenahan, “Special Purpose Acquisition Companies: An Introduction,” Harvard Law
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that because of the pressure to conduct a de-SPAC within a specified period of
time, some SPAC sponsors may be more interested in getting any deal done
rather than getting a good deal done in order to retain the promotes.51
Additionally, the size of a SPAC’s promote draws concern for some. For
example, Opendoor’s $4.8 billion de-SPAC transaction, which included $414
million in SPAC IPO proceeds, awarded the sponsors $60 million in shares.52 The
size of the typical sponsor compensation reduces returns to public investors,
sometimes substantially.
 Exchange listing standards. Because of SPACs’ increased popularity in recent
years, stock exchanges have tried to relax their listing standards to attract such
companies. For example, some exchanges proposed reducing certain SPAC
public shareholder thresholds, but the SEC rejected the proposals.53 Some argue
that loosening SPAC listing standards might lower the bar for investor
protection.54
SEC Proposed Rule
The SEC proposed a new rule on SPACs on March 30, 2022, that aims to increase disclosure and
align certain SPAC IPO requirements with those that apply to traditional IPOs.55 Provisions in the
proposal include (1) increased disclosure for SPAC and de-SPAC processes; (2) amended
regulatory treatment of certain shell company mergers and related financial statement
requirements; (3) amended guidance regarding the use of projections in SEC filings, as well as
when projections are disclosed in connection with de-SPAC transactions; and (4) a safe harbor
under the Investment Company Act of 1940 for SPACs that meet qualifying criteria such as
maintaining high asset quality and completing the de-SPAC transitions within a certain time
period.56 The SEC’s proposed rule reportedly contributed to the cooling down of the SPAC
market in 2022.57

School Forum on Corporate Governance, July 6, 2018, https://corpgov.law.harvard.edu/2018/07/06/special-purpose-
acquisition-companies-an-introduction.
51 For example, Duncan Lamont, “The Pros, Cons and Incentives Behind the SPAC-Craze Sweeping Markets,”
Schroders, March 31, 2021, https://www.schroders.com/en/us/insights/equities/the-pros-cons-and-incentives-behind-
the-spac-craze-sweeping-markets.
52 Ortenca Aliaj and Eric Platt, “Share Reward for Founder of Blank-Cheque Company in Focus After $4.8bn
Opendoor Deal,” Financial Times, September 15, 2020, https://www.ft.com/content/ccd2dc37-d7e4-497d-92c6-
9d3b86963e0a.
53 SEC, Self-Regulatory Organizations; New York Stock Exchange LLC; Order Disapproving a Proposed Rule Change
to Amend the Listed Company Manual for Special Purpose Acquisition Companies to Reduce the Continued Listing
Standards for Public Holders from 300 to 100 and to Enable the Exchange to Exercise Discretion to Allow Special
Purpose Acquisition Companies a Reasonable Time Period Following a Business Combination to Demonstrate
Compliance with the Applicable Quantitative Listing Standards, June 14, 2019, https://www.sec.gov/rules/sro/nyse/
2019/34-86117.pdf.
54 For example, Jeffrey Mahoney, General Counsel, Council of Institutional Investors, letter to the SEC, February 11,
2019, https://www.sec.gov/rules/sro/nyse/2019/34-86117.pdf.
55 SEC, “SEC Proposes Rules to Enhance Disclosure and Investor Protection Relating to Special Purpose Acquisition
Companies, Shell Companies, and Projections,” press release, March 30, 2022, https://www.sec.gov/news/press-
release/2022-56.
56 SEC, “Special Purpose Acquisition Companies, Shell Companies, and Projections,” 87 Federal Register 29458-
29574, May 13, 2022.
57 Brewer, “IPOs Fall to Earth.”
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For Further Information
For questions about SPACs, contact Eva Su, Analyst in Financial Economics.
Additional reading on SPACs is available in CRS In Focus IF11655, SPAC IPO: Background and
Policy Issues, by Eva Su.
Securities Trading and Market Structure
As mentioned, securities are initially created and offered in the primary market and are
subsequently traded in the secondary market. A trading system that brings together multiple
securities buyers and sellers generally has to register with the SEC as a national securities
exchange or operate as an alternative trading system (ATS) and register as a broker-dealer.58
A national securities exchange is a securities exchange that has registered with the SEC under
Section 6 of the Securities Exchange Act of 1934.59 ATSs are SEC-regulated electronic trading
systems that match securities orders for buyers and sellers. Some ATSs are referred to as “dark
pools” because, unlike national securities exchanges, they do not publicly display the size and
price of their orders.60 A broker is any person engaged in securities buying and selling for others,
while a dealer is any person engaged in securities transactions from his or her own account.
Because most securities firms act as both brokers and dealers, they are generally referred to as
broker-dealers.
Figure 4. Equity Market Structure

Source: SEC.
Figure 4 illustrates the typical equity market structure for a stock trade.61 When an investor goes
through a broker-dealer to place a trade, the broker-dealer could route the customer order to one

58 See SEC Regulation National Market System and Regulation Alternative Trading Systems. 17 C.F.R. §§200, 201,
230, 240, 242, 249, and 270.
59 15 U.S.C. §78f.
60 FINRA, “Where Do Stocks Trade?,” December 3, 2021, https://www.finra.org/investors/insights/where-do-stocks-
trade.
61 SEC, Staff Report on Equity and Options Market Structure Conditions in Early 2021, October 14, 2021,
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of several execution venues. These venues include national securities exchanges and off-
exchange venues such as ATSs, single-dealer platforms, and wholesalers (also referred to as
market makers).62 Transactions also go through a clearance and settlement process, whereby
transaction details are verified and money and shares are transferred between the accounts of the
buyer and seller.
Many regulatory requirements promulgated by the SEC and FINRA govern securities trading and
market structure. These requirements include rules designed to promote market transparency
(e.g., publicly displayed quotations and other disclosure and reporting requirements), fair access
and representation (e.g., standards of care for customer transactions to mitigate conflicts of
interest and other risks), intermarket access, sub-penny pricing restrictions, and market data
consolidation and distribution.63
Policy Issue: Payment for Order Flow
Retail investor trading experienced an unprecedented surge in 2020 and 2021.64 A significant
amount of those trades were managed by major discount broker-dealers such as Charles Schwab,
E*Trade, Robinhood, and TD Ameritrade. Among the factors that helped drive the surge is zero-
commission trading, a practice that is profitable in part because of what is known as “payment for
order flow” (PFOF), a controversial rebate paid by market makers to the broker-dealers.65 In a
PFOF arrangement, market makers—that is, wholesale brokerage firms alternatively known as
wholesalers or internalizers—make cash payments to retail broker-dealer firms in exchange for
marketable retail customer stock order flows.66 The market makers—such as Citadel, Morgan
Stanley, Susquehanna, Virtu, and Wolverine—then typically execute the orders in-house in a
process called internalization. By various accounts, PFOF has played a significant role in helping
lower retail broker-dealer commissions, thereby facilitating zero-commission trading.
For decades, PFOF has been the subject of policy debates. The uproar in early 2021 surrounding
the behavior of GameStop stock—which was traded by various broker-dealers, including those
who received PFOF—has helped to renew such debates.67 At the center of policy debates over the
arrangements is the broker-dealer’s duty of best execution, which requires a broker-dealer to seek
the most favorable terms for a customer’s transaction.68 Some commentators have expressed
concern that PFOF generates conflicts of interest that may interfere with a broker-dealer’s
compliance with its best-execution duties.

https://www.sec.gov/files/staff-report-equity-options-market-struction-conditions-early-2021.pdf.
62 A market maker is a firm that stands ready to buy or sell a stock at publicly quoted prices. For more information, see
SEC, Market Centers: Buying and Selling Stock, https://www.sec.gov/fast-answers/answersmarket.
63 Regulation NMS and Regulation ATS. 17 C.F.R. §242.600-614 and 17 C.F.R. §242.300-304.
64 Eric Platt, Madison Darbyshire, and Kate Duguid, “Retail Investors Take Shelter in Cash After Stock Market Rout,”
Financial Times, October 20, 2022, https://www.ft.com/content/d62cb3f3-853a-4000-a46d-2f6e966954e8.
65 Katherine Doherty and Lydia Beyoud, “Why Payment for Order Flow Made Trades Free but Left SEC Skeptical,”
Washington Post, September 23, 2022, https://www.washingtonpost.com/business/why-payment-for-order-flow-made-
trades-free-but-left-sec-skeptical/2022/09/23/edc91bc2-3b68-11ed-b8af-0a04e5dc3db6_story.html.
66 A marketable order is an order for a securities trade that is immediately executable against previously provided
securities trade orders.
67 For more on the GameStop market event, see CRS Insight IN11591, GameStop-Related Market Volatility: Policy
Issues, by Eva Su; and CRS Insight IN11615, GameStop-Related Market Volatility: What Happened?, by Gary Shorter.
68 FINRA, “Best Execution,” https://www.finra.org/rules-guidance/guidance/reports/2021-finras-examination-and-risk-
monitoring-program/best-execution.
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Supporters of PFOF argue that the arrangement benefits investors by subsidizing low- or zero-
commission rates and other services.69 In addition, they note that marketable retail orders that
tend to be routed to the PFOF rebaters must be executed under best-execution protocols and are
executed at the national best bid or offer or at a price that improves on it.70 However, concerns
have arisen that because broker-dealers may not pass PFOF rebates on to their clients, they may
have economic incentives to send retail orders to rebating market makers that are the most
beneficial to them instead of the clients, creating potential conflicts over their duty of best
execution.71 PFOF has been effectively banned in the United Kingdom, Australia, and Canada
due to such conflict-of-interest concerns.72 Also, the European Union is reportedly reviewing the
practice.73
Academic research has not formed a consensus regarding whether PFOF would improve or harm
price execution. One study has found that the shift to PFOF-facilitated zero commissions was
beneficial to retail investors in terms of their overall costs of trading.74 In contrast, another study
found that trades executed at the best-quoted prices surged after the United Kingdom effectively
banned PFOF.75 Other research found that PFOF-facilitated zero commissions led to overall
improvements in market quality, but retail investors received less price improvement per share.76
A 2022 study of 85,000 simultaneous market orders with five broker-dealers showed that PFOF
does not appear to harm price execution.77
SEC Proposed Rules
On December 14, 2022, the SEC proposed multiple rules and amendments to reform the equity
market structure.78 This initiative includes proposals that would require certain retail orders to be

69 Senate Banking Committee, “Toomey Launches Effort to Preserve Commission-Free Trading,” press release,
October 28, 2021, https://www.banking.senate.gov/newsroom/minority/toomey-launches-effort-to-preserve-
commission-free-trading.
70 Senate Banking Committee, “Toomey Launches Effort.”
71 Testimony of SEC Chair Gary Gensler in U.S. Congress, House Committee on Financial Services, May 6, 2021,
https://www.sec.gov/news/testimony/gensler-testimony-20210505.
72 Bart Zhou Yueshen, Markus Baldauf, and Joshua Mollner, “Banning Payment for Order Flow May Benefit No One,”
Insead, September 29, 2022, https://knowledge.insead.edu/economics-finance/banning-payment-order-flow-may-
benefit-no-one.
73 European Union, Proposal for a Regulation of the European Parliament and of the Council Amending Regulation
(EU) No 600/2014 as Regards Enhancing Market Data Transparency, Removing Obstacles to the Emergence of a
Consolidated Tape, Optimising the Trading Obligations and Prohibiting Receiving Payments for Forwarding Client
Orders, November 25, 2021, https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52021PC0727.
74 Samuel Adams, Connor Kasten, and Eric K. Kelley, “Do Investors Save When Market Makers Pay? Retail Execution
Costs Under Payment for Order Flow Models,” Evidence Investor, January 2021, https://www.evidenceinvestor.com/
evidence/do-investors-save-when-market-makers-pay-retail-execution-costs-under-payment-for-order-flow-models/.
75 CFA Institute, “Payment for Order Flow in the United Kingdom,” 2016, https://www.cfainstitute.org/-/media/
documents/article/position-paper/payment-for-order-flow-united-kingdom.pdf.
76 Pankaj K. Jain et al., “Trading Volume Shares and Market Quality: Pre- and Post-Zero Commissions,” Evidence
Investor, December 2021, https://www.evidenceinvestor.com/evidence/trading-volume-shares-and-market-quality-pre-
and-post-zero-commissions/.
77 Christopher Schwarz et al., “The ‘Actual Retail Price’ of Equity Trades,” SSRN, September 14, 2022,
http://dx.doi.org/10.2139/ssrn.4189239.
78 SEC, SEC Proposals Related to Market Structure, December 22, 2022, https://www.sec.gov/newsroom/market-
structure-proposals-december-2022; SEC, “Order Competition Rule,” 88 Federal Register 128-245, January 3, 2023;
SEC, “Regulation NMS: Minimum Pricing Increments, Access Fees, and Transparency of Better Priced Orders,” 88
Federal Register 80266-80359, December 29, 2022; SEC, “Regulation Best Execution,” 88 Federal Register 5440-
5556, January 27, 2023; SEC, “Disclosure of Order Execution Information,” 88 Federal Register 3786-3905, January
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put up for auction at securities exchanges or other trading venues before they could be executed
internally by any trading venues that restrict order-by-order competition. If implemented, the rule
may reduce the attractiveness of PFOF to wholesalers.79 The SEC also proposed a new rule on
Regulation Best Execution for the first time (while FINRA already has a rule that relates to best
execution).80 The rule aims to strengthen broker-dealer best execution practices, including those
governing PFOF. For more on SEC-proposed rules, see CRS In Focus IF12336, SEC-Proposed
Regulations to Reform Stock Trading, by Eva Su.
For Further Information
For questions about PFOF, contact Gary Shorter, Specialist in Financial Economics.
For questions about the SEC’s equity market structure reform, contact Eva Su, Analyst in
Financial Economics.
Additional reading on PFOF, Robinhood, and GameStop-related market events is available in:
CRS In Focus IF11800, Broker-Dealers and Payment for Order Flow, by Gary Shorter
CRS In Focus IF12332, Payment for Order Flow: The SEC Proposes Reforms, by Gary Shorter
CRS In Focus IF12336, SEC-Proposed Regulations to Reform Stock Trading, by Eva Su
CRS In Focus IF11663, Robinhood, the Fintech Discount Broker: Recent Developments and
Concerns, by Gary Shorter
CRS Insight IN11591, GameStop-Related Market Volatility: Policy Issues, by Eva Su
Policy Issue: Treasury Market Disruptions
The $24 trillion U.S. Treasury securities market is considered one of the most important financial
markets in the world.81 The market provides a low-risk (backed by the full faith and credit of the
U.S. government) and liquid asset for global investors while raising funding to finance U.S.
federal spending. Any event that significantly disrupts Treasury market functions, such as sudden
increases in price volatility or reductions in liquidity, could cause distress in the global financial
system. Market disruptions in 2014, 2019, and 2020 show that the Treasury market is not immune
to such disruptions.82
Multiple authorities are responsible for regulating or operating various components of the
Treasury market. For example, the Department of the Treasury is responsible for securities
issuance, while the Federal Reserve (Fed) executes auctions and buybacks (the latter are rare).
Trading in Treasury securities is facilitated mainly by brokers and dealers. The Government
Securities Act of 1986 (P.L. 99-571) establishes the broker-dealer regulatory framework in the
government securities market. The Trade Reporting and Compliance Engine (TRACE) is the

20, 2023.
79 SEC, “SEC Proposes Rule to Enhance Competition for Individual Investor Order Execution,” press release,
December 14, 2022, https://www.sec.gov/news/press-release/2022-225; SEC, “Order Competition Rule,” 88 Federal
Register 128-245, January 3, 2023.
80 SEC, “SEC Proposes Regulation Best Execution,” press release, December 14, 2022, https://www.sec.gov/news/
press-release/2022-226; and FINRA, “Rule 5310 Best Execution and Interpositioning,” https://www.finra.org/rules-
guidance/rulebooks/finra-rules/5310.
81 SIFMA, “U.S. Treasury Securities Statistics,” October 7, 2022, https://www.sifma.org/resources/research/us-
treasury-securities-statistics.
82 For more discussions of Treasury market events, see CRS In Focus IF12012, Treasury Securities Market Disruptions
and Policy Issues, by Eva Su.
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main system for consolidating Treasury securities transaction data and reporting. FINRA operates
TRACE with the involvement of the Treasury, SEC, Fed, and other official entities. The process
for clearing and settling transactions in Treasury securities is facilitated by entities operated by or
under the oversight of the Fed and the SEC. Treasury derivatives markets generally include
Treasury futures, options, swaps, and futures on indices related to Treasuries, among other
instruments. The CFTC oversees these Treasury derivatives markets.
Policy discussions about the Treasury market focus on diagnosing the causes of market
disruptions and identifying potential methods to prevent or mitigate the related risks. Abnormal
events in the Treasury market and their increased frequency have revealed areas of structural
vulnerability. According to a number of observers, the root cause of the increase in Treasury
market disruptions relates to the rapid growth of the market’s size, which now outstrips dealers’
intermediation and market-making capacity.83 Specifically, the nominal amount of Treasury
securities held by the public more than tripled between 2008 and 2020, placing pressure on
intermediation.
Various government agencies, industry practitioners, and think tanks have made a number of
recommendations in recent years to address these challenges, some of which are broadly
described below.84 Critics of these recommendations assert that some proposals would entail
undue government intervention and impose additional costs on market participants. Proposed
policy options include the following:
 Enhance market-making capacity through the creation of a facility at the
Fed—which would provide permanent, broad, and direct access to the Fed’s
financing—in an effort to ensure intermediaries’ confidence in market making.
The Fed launched a related standing facility in 2021 to provide a backstop for
Treasury markets.85
 Increase safeguards including potential registration of certain large trading
firms as dealers under securities law and expand Treasury securities trading
regulation (e.g., through changes to SEC Regulation ATS).
 Mandate central clearing of more trading activities through a central
counterparty clearinghouse. Central clearing could reduce counterparty risk,
increase transparency, and expand intermediaries’ balance sheet capacity (e.g.,
through “netting”).86 The specific steps could include the expansion of central
clearing to all Treasury securities and repos.
 Increase market transparency and monitoring by expanding reporting,
disclosure, and data collection and tracking. Recommendations along these lines
include potential enhancements to FINRA’s TRACE reporting for Treasury

83 See, for example, Nellie Liang and Pat Parkinson, “Enhancing Liquidity of the U.S. Treasury Market Under Stress,”
Brookings Institution, December 16, 2020, p. 1, https://www.brookings.edu/wpcontent/uploads/2020/12/WP72_Liang-
Parkinson.pdf.
84 Group of Thirty, U.S. Treasury Markets Steps Toward Increased Resilience, July 1, 2021, https://group30.org/
images/uploads/publications/G30_U.S_._Treasury_Markets-_Steps_Toward_Increased_Resilience__1.pdf; and Inter-
Agency Working Group on Treasury Market Surveillance, Recent Disruptions and Potential Reforms in the U.S.
Treasury Market: A Staff Progress Report, November 8, 2021, https://home.treasury.gov/system/files/136/IAWG-
Treasury-Report.pdf.
85 Federal Reserve, “Standing Repurchase Agreement (Repo) Facility,” https://www.federalreserve.gov/
monetarypolicy/standing-overnight-repurchase-agreement-facility.htm.
86 For more on netting, see Michael Fleming and Frank Keane, The Netting Efficiencies of Marketwide Central
Clearing, April 2021, https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr964.pdf.
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securities. Among the enhancements under consideration is a shortened trade
reporting time frame. Others have recommended that Treasury securities
transactions be publicly disclosed like the TRACE reporting for corporate
bonds.87
 Establish a new all-to-all trading platform that could allow major Treasury
market participants (e.g., asset managers, dealers, and nonbank liquidity
providers) to trade directly with any other participants. Some believe this
potential new platform could be especially helpful during market distress when
traditional intermediaries could face constraints.88
SEC and FINRA Proposed Rules
The SEC proposed two new rules in 2022 that align with some of the recommendations discussed
above. In January 2022, the SEC proposed amending Regulation ATS to include Treasury market
platforms.89 This proposal would apply Regulation ATS provisions to platforms that trade
Treasury securities or repurchase and reverse repurchase agreements on Treasury securities. In
September 2022, the SEC proposed amendments to Rule 17Ad-22 to impose requirements on
covered clearing agencies providing central counterparty services for Treasury securities.90 The
proposal requires Treasury market-clearing agencies to adopt policies and procedures designed to
require their members to submit for clearing certain specified secondary market transactions
involving Treasury securities. Because only around 13% of Treasury securities cash transactions
were centrally cleared as of 2017,91 the proposal’s requirements could have broad potential effects
on market practices.
FINRA filed two proposed rules with the SEC and published a regulatory notice with regard to
the expansion of TRACE reporting requirements in 2022.92 The proposals partially address the

87 Group of Thirty, U.S. Treasury Markets Steps Toward Increased Resilience, p. 17.
88 Alain Chaboud et al., All-to-All Trading in the U.S. Treasury Market, Federal Reserve Bank of New York, October,
2022, https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr1036.pdf; Libby Cantrill et al., “How
Can Policymakers Improve the Functioning of the U.S. Treasury Market?,” PIMCO, September 8, 2022,
https://www.pimco.com/en-us/insights/viewpoints/in-depth/how-can-policymakers-improve-the-functioning-of-the-us-
treasury-market; and Inter-Agency Working Group for Treasury Market Surveillance, Enhancing the Resilience of the
U.S. Treasury Market: 2022 Staff Progress Report, November 10, 2022, https://home.treasury.gov/system/files/136/
2022-IAWG-Treasury-Report.pdf.
89 SEC, “SEC Proposes Amendments to Include Significant Treasury Markets Platforms Within Regulation ATS,”
press release, January 26, 2022, https://www.sec.gov/news/press-release/2022-10; SEC, “Amendments Regarding the
Definition of ‘Exchange’ and Alternative Trading Systems (ATSs) That Trade U.S. Treasury and Agency Securities,
National Market System (NMS) Stocks, and Other Securities,” 87 Federal Register 15496-15696, April 18, 2022.
90 SEC, “SEC Proposes Rules to Improve Risk Management in Clearance and Settlement and to Facilitate Additional
Central Clearing for the U.S. Treasury Market,” press release, September 14, 2022, https://www.sec.gov/news/press-
release/2022-162; SEC, “Standards for Covered Clearing Agencies for U.S. Treasury Securities and Application of the
Broker-Dealer Customer Protection Rule with Respect to U.S. Treasury Securities,” 87 Federal Register 64610-64682,
October 25, 2022.
91 U.S. Department of the Treasury, Board of Governors of the Federal Reserve System, Federal Reserve Bank of New
York, SEC, and CFTC, Recent Disruptions and Potential Reforms in the U.S. Treasury Market: A Staff Progress
Report, November 8, 2021, https://home.treasury.gov/system/files/136/IAWGTreasury-Report.pdf.
92 FINRA, SR-FINRA-2022-011, https://www.finra.org/rules-guidance/rule-filings/sr-finra-2022-011; FINRA, SR-
FINRA-2022-013, https://www.finra.org/rules-guidance/rule-filings/sr-finra-2022-013; and FINRA, Regulatory Notice
22-12, https://www.finra.org/rules-guidance/notices/22-12.
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previously discussed policy concern about TRACE reporting time. Related costs could occur
when FINRA member firms update their reporting systems to enable the proposed compliance.93
For Further Information
For questions about Treasury securities, contact Eva Su, Analyst in Financial Economics.
For questions about TRACE, contact Gary Shorter, Specialist in Financial Economics.
Additional reading on Treasury securities is available in CRS In Focus IF12012, Treasury
Securities Market Disruptions and Policy Issues, by Eva Su.
Investment Management
The asset management industry is large and complex. Asset management companies—also
referred to as investment management companies, money managers, funds, or investment funds—
are collective investment vehicles that pool money from various individual or institutional
investor clients and invest on their behalf.94 As the industry’s primary regulator, the SEC oversees
asset managers with more than $120 trillion in assets under management combined.95
The industry has grown substantially due to retail investors’ increased reliance on asset managers
to invest their money for them rather than investing their own money themselves. Nearly half
(47.9%) of all U.S. households owned some form of SEC-registered investment company funds
as of 2021.96 When operating as expected, the industry functions to pool assets, share risks,
allocate resources, and produce research information.
Asset management companies offer public or private funds. These two types of funds are
distinguished by the kinds of investors who can access them and by the regulation applied to
them.97
Public funds—such as mutual funds, exchange-traded funds (ETFs), closed-end funds, and unit
investment trusts—are broadly accessible to investors of all types. Private funds are limited to

93 Russell Fecteau and Margaret Blake, “FINRA Seeks to Expand Reporting Requirements for Transactions in TRACE-
Eligible Securities,” Morgan Lewis, June 14, 2022, https://www.morganlewis.com/pubs/2022/06/finra-seeks-to-
expand-reporting-requirements-for-transactions-in-trace-eligible-securities.
94 While an investment company could manage multiple funds, in common usage, the word fund is also used
interchangeably to describe an investment management company. For this report, unless noted otherwise, funds are also
referred to as investment companies. Per Title 15, Section 80a-3(a)(1), of the U.S. Code, the statutory definition of
investment company is any issuer that “(A) is or holds itself out as being engaged primarily, or proposes to engage
primarily, in the business of investing, reinvesting, or trading in securities; (B) is engaged or proposes to engage in the
business of issuing face-amount certificates of the installment type, or has been engaged in such business and has any
such certificate outstanding; or (C) is engaged or proposes to engage in the business of investing, reinvesting, owning,
holding, or trading in securities, and owns or proposes to acquire investment securities having a value exceeding 40 per
centum of the value of such issuer’s total assets (exclusive of Government securities and cash items) on an
unconsolidated basis.”
95 The SEC’s Division of Investment management oversees around $128 trillion in regulatory assets under management
as of 2022. For more details, see William Birdthistle, Director of SEC Division of Investment Management, “Remarks
at PLI: Investment Management 2022,” July 26, 2022, https://www.sec.gov/news/speech/birdthistle-remarks-pli-
investment-management-2022-072622.
96 Investment Company Institute, 2022 Investment Company Fact Book, https://www.ici.org/system/files/2022-05/
2022_factbook.pdf.
97 For more on public and private funds, including descriptions of different types of public and private funds and their
regulatory frameworks, see CRS Report R45957, Capital Markets: Asset Management and Related Policy Issues, by
Eva Su.
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institutional and certain retail (individual) investors who are perceived as better positioned to
understand and tolerate risks. The main types of private funds are private equity, hedge fund,
venture capital, and family office.98
Additionally, a number of intermediaries, such as investment advisers and custodians, provide
distribution channels, safeguards, and other essential services to investors and fund issuers. As of
2021, public fund net asset value (NAV) totaled around $35 trillion, and private fund NAV totaled
around $14 trillion.99 NAV is the total value of a fund’s assets minus liabilities and is thus
generally smaller than the fund’s assets under management. Per-share NAV often provides an
indication of reference for the price at which a share of a fund can be purchased. Table 1
illustrates the size of different types of public and private funds as measured by NAV.100
Table 1. Public and Private Funds Net Asset Value as of 2021 ($Billions)
Public Funds
Mutual Fund
$26,964
Exchange-Traded Fund (ETF)
$7,191
Closed-End Fund
$309
Unit Investment Trust
$95
Total
$34,559

Private Funds

Private Equity
$5,729
Hedge Fund
$5,122
Venture Capital
$308
Other Private Funds
$2,869
Total
$14,028
Source: CRS using data from the SEC and Investment Company Institute.
Notes: The table il ustrates net asset value (NAV), not gross asset value. NAV is the total value of assets minus
liabilities. Closed-end fund data include preferred share classes. Total public fund NAV includes mutual fund
holdings of closed-end funds and ETFs. Private funds data as reported in SEC Form PF, Question 9. The private
fund types are not mutually exclusive. Other private funds include liquidity funds, real estate funds, securitized
asset funds, and others.
The business practices of and regulatory requirements for asset management companies vary.
Investment funds differ based on their asset risk profile, investor access, portfolio company
composition, and ease of buying or selling their shares, among other things.
The industry is governed by a somewhat fragmented regulatory regime stemming from several
different statutes.101 Most of the regulatory framework was created in the 1930s and 1940s, but

98 See CRS Report R45957, Capital Markets: Asset Management and Related Policy Issues, by Eva Su.
99 SEC, Private Funds Statistics, July 19, 2022 https://www.sec.gov/divisions/investment/private-funds-statistics/
private-funds-statistics-2021-q4.pdf; and Investment Company Institute, 2022 Investment Company Fact Book.
100 SEC, “Net Asset Value,” https://www.investor.gov/introduction-investing/investing-basics/glossary/net-asset-value.
101 The main statutes that govern the asset management industry at the federal level include the Investment Company
Act of 1940 (P.L. 76-768), the Investment Advisers Act of 1940 (P.L. 76-768), the Securities Act of 1933 (P.L. 73-22),
and the Securities Exchange Act of 1934 (P.L. 73-291). For more on securities laws, see CRS In Focus IF11422,
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the business practices and trends affecting the industry are evolving. Examples of this evolution
include (1) the rapid growth of the industry; (2) the increasing dependence of American
businesses on capital markets financing; (3) the shift from active to passive investment styles; and
(4) the expansion of the private securities markets, including the growth of private funds.102 This
section will discuss policy issues relating to money market mutual funds and private equity in
more detail.
Policy Issue: Money Market Mutual Funds (MMFs)
An MMF is a mutual fund that, under SEC Rule 2a-7, can invest only in high-quality and short-
term securities.103 MMFs are considered safe investment options and common alternatives to
bank deposits, although they are not federally insured like bank deposits. MMFs provide
financing for federal and local governments, private corporations, and (indirectly) households.
They also serve as investment and cash management tools for retail and institutional investors.
The MMF industry also offers short-term funding for businesses and government entities to help
them pay for things such as operational expenses, schools, bridges, or other financial obligations.
MMFs are significant holders of U.S. government securities, commercial paper, municipal debt,
and certificates of deposits.104 For example, MMFs are especially important for the commercial
paper market, an integral part of the short-term funding markets for financing businesses and
households. MMFs held around 20% of all U.S. commercial paper outstanding as of April
2022.105 Because of the strong connection between MMFs and the short-term funding markets,
the health of MMF operations could affect businesses, government entities, households, and
investors who rely on such markets.
In recent years, the MMF industry’s assets increased, while the number of funds declined.106
Government, prime (or corporate), and tax-exempt (or municipal) are the three main types of
MMFs. These funds have different asset compositions and regulations. The MMF industry’s net
assets stood at $5.1 trillion as of July 2022. The industry’s net assets have increased over time,
especially after the COVID-19 pandemic when increases were led by government MMFs and
only partially offset by decreases in prime and tax-exempt MMFs. Government MMFs held the
most net assets ($4.1 trillion, or 80%, of the overall MMF industry assets), substantially more
than prime MMFs ($917 billion, or 18%) and tax-exempt MMFs ($104 billion, or 2%).107 Over
the past decade, the number of MMFs decreased by nearly half, from 600 in October 2012 to 306
in July 2022.108 Multiple reasons, including reduced fee income and increased operating costs,
might have contributed to the decline in the number of MMFs.

Federal Securities Laws: An Overview, by Chris D. Linebaugh, Jay B. Sykes, and Nicole Vanatko.
102 For details on these individual items, see CRS Report R45957, Capital Markets: Asset Management and Related
Policy Issues, by Eva Su.
103 For more on MMFs, see CRS Report R47309, Money Market Mutual Funds: Policy Concerns and Reform Options,
by Eva Su.
104 Federal Reserve Board, “Money Market Funds: Investment Holdings Detail,” https://www.federalreserve.gov/
releases/efa/efa-project-money-market-funds-investment-holdings-detail.htm.
105 See Figure 2 of CRS Report R47309.
106 See Figure 3 and Figure 4 of CRS Report R47309.
107 SEC, Money Market Fund Statistics Form N-MFP Data, Period Ending July 2022, Filings Received Through
August 12, 2022, August 15, 2022, https://www.sec.gov/files/mmf-statistics-2022-07.pdf.
108 SEC, Money Market Fund Statistics Form N-MFP Data.
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Despite perceptions of safety, MMFs both experienced and contributed to market disruptions in
2008 that accelerated the 2007-2009 financial crisis. At the time, the Treasury Department and the
Federal Reserve developed multiple intervention tools to provide a backstop for the industry.
Following the 2007-2009 crisis, the MMF industry underwent major regulatory reforms. During
the 2020 COVID-induced market distress, however, some of the same MMF-related financial
stability concerns recurred.109 The federal government once again took action to mitigate the
related risks.110 These conditions have led to discussions about the effectiveness of previous
MMF reforms and how policymakers could proceed with potential future reforms.
At the center of the MMF-related financial stability concern is MMFs’ vulnerability to run risk.
Run risk refers to the scenario where many investors withdraw their investments nearly
simultaneously, triggering negative feedback loops and contagion effects for the broader financial
system.111 MMFs are susceptible to runs because their shareholders have an incentive to redeem
their shares before others do when there is a perception that the fund might experience a loss (i.e.,
the first-mover advantage). The SEC published an MMF reform proposed rule in December 2021
that includes multiple options to address run risk.112 Other financial authorities have also come up
with additional proposals that are not part of the SEC’s proposed amendments to MMF
regulation. These proposals include113
 Rolling back some earlier reform provisions regarding liquidity fees and
redemption gates;
 Addressing the first-mover advantage through swing pricing and minimum
balance at risk;
 Increasing transparency through additional disclosure requirements and floating
NAV;
 Addressing MMF liquidity needs through increased liquidity requirements; and
 Reducing MMF portfolio risks through mandatory sponsor support, a capital
buffer, and limits on eligible assets.
SEC Proposed Rule
The SEC proposed amendments to its MMF rules on December 15, 2021.114 The proposed
amendments would increase liquidity requirements, require additional disclosures, and roll back
some of the earlier reform provisions. In the SEC’s view, the proposed reforms would reduce
MMF investors’ incentives to run.

109 Antoine Bouveret, Antoine Martin, and Patrick McCabe, Money Market Fund Vulnerabilities: A Global
Perspective, Federal Reserve, March 8, 2022, https://www.federalreserve.gov/econres/feds/files/2022012pap.pdf.
110 Federal Reserve, “Money Market Mutual Fund Liquidity Facility,” https://www.federalreserve.gov/monetarypolicy/
mmlf.htm.
111 For more on run risk, see Kenechukwu Anadu and Siobhan Sanders, “Money Market Mutual Funds: Runs,
Emergency Liquidity Facilities, and Potential Reforms,” Federal Reserve Bank of Boston, May 21, 2021,
https://www.bostonfed.org/-/media/Documents/Workingpapers/PDF/2021/sra-note-2103.pdf.
112 SEC, “Money Market Fund Reforms,” 87 Federal Register 7248-7356, February 8, 2022.
113 For a detailed explanation of each proposal, see CRS Report R47309.
114 SEC, “SEC Proposes Amendments to Money Market Fund Rules,” press release, December 15, 2021,
https://www.sec.gov/news/press-release/2021-258; SEC, “Money Market Fund Reforms,” 87 Federal Register 7248-
7356, February 8, 2022.
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For Further Information
For questions on MMFs, contact Eva Su, Analyst in Financial Economics.
Additional reading on MMFs, ETFs, and the asset management industry in general is available in:
CRS Report R47309, Money Market Mutual Funds: Policy Concerns and Reform Options, by
Eva Su
CRS Report R45957, Capital Markets: Asset Management and Related Policy Issues, by Eva Su
CRS Report R45318, Exchange-Traded Funds (ETFs): Issues for Congress, by Eva Su
Policy Issue: Private Equity
Private equity (PE) is a type of private fund, meaning a fund that generally pools money from
institutional and individual investors that meet certain criteria indicating they are sophisticated or
able to withstand financial loss.115 PE investors include pension funds, other private funds,
university endowments, foreign institutions, high-net-worth individuals, insurance companies,
and nonprofits.116
The term private equity can be used to describe a variety of funds. For example, some observers
use the term to describe all types of private funds.117 Others discuss PE as one type of fund within
the broader categorization of private funds that also includes hedge funds, venture capital, and
family offices. This report uses the terminology set forth by the SEC, which separates PE from
other private fund types.118 Under this definition, PE funds typically take a controlling interest in
an operating business, also known as a portfolio company, and engage in financial and
operational activities with the hope of increasing the company’s value.119 PE funds are known for
active ownership, longer investment time horizons, and financial leverage through the use of debt.
However, other PE investment and operational styles also exist.120
The PE industry has grown in size in recent years, including during the COVID-19 pandemic.
According to the SEC, between the first quarter of 2016 and the second quarter of 2022, the
number of PE funds nearly doubled to reach approximately 19,000.121 Aggregate gross fund
assets more than tripled to almost $6.4 trillion during that period.122

115 For more on private equity, see CRS Report R47053, Private Equity and Capital Markets Policy, by Eva Su. For
more on public and private funds, see CRS Report R45957, Capital Markets: Asset Management and Related Policy
Issues, by Eva Su.
116 SEC private funds statistics, https://www.sec.gov/divisions/investment/private-funds-statistics.
117 For example, some experts define private equity as an alternative asset class that includes all assets beyond the three
primary asset classes—stocks, bonds, and cash. For more details, see Benoit Leleux, Hans van Swaay, and Esmeralda
Megally, Private Equity 4.0: Reinventing Value Creation (The Wiley Finance Series, 2015).
118 SEC, Form PF—Reporting Form for Investment Advisers to Private Funds and Certain Commodity Pool Operators
and Commodity Trading Advisors, https://www.sec.gov/files/formpf.pdf.
119 SEC, “Private Equity Funds,” https://www.investor.gov/introduction-investing/investing-basics/investment-
products/ private-investment-funds/private-equity.
120 Financial leverage generally refers to the use of debt to buy more assets or fund existing operations. Other forms of
leverage measures also exist. For more information, see Adam Hayes, “Leverage,” Investopedia, March 19, 2021,
https://www.investopedia.com/terms/l/leverage.asp.
121 SEC, “Division of Investment Management Private Funds Statistics,” https://www.sec.gov/divisions/investment/
private-funds-statistics.shtml.
122 SEC, “Division of Investment Management Private Funds Statistics.”
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Some academic research has suggested that PE plays a role in enhancing competition, enabling
capital formation, assisting distressed company resolution, and transforming financially
underperforming companies.123 The PE industry has also increased in importance because of the
significant growth of private securities markets.124
Some observers have raised financial stability concerns in light of the PE industry’s growth in
size, importance, and complexity.125 The PE industry has also generated policy debates regarding
its performance record, operational practices, and industry-specific issues, including the
compatibility of PE’s profit maximization practices with certain public-service-oriented
industries. Different aspects of PE’s operating and financing model, which focuses on value
creation for investors, attract policymakers’ attention.126 Below are some examples:
 Capital restructuring. PE funds sometimes restructure portfolio companies’
debt and equity to manage the total cost of capital, draw down capital not yet
invested, or negotiate with lenders to gain more flexibility for loans. Some
observers view these activities as a way to extract wealth from portfolio
companies while transferring risk to debt investors.127 Other observers view
excessive leverage (e.g., debt borrowing) as a financial stability concern because
it could reduce the portfolio companies’ ability to absorb risks during adverse
market conditions.128
 Operational changes. PE firms may increase productivity through cutting jobs,
selling non-core assets, or making adjustments to their portfolio companies’
business strategies. Some observers argue that such practices enrich investors at
the expense of affected individuals and communities.129

123 See, for example, Steven J. Davis et al., The (Heterogenous) Economic Effects of Private Equity Buyouts, Harvard
Business School, October 7, 2019, https://www.hbs.edu/ris/Publication%20Files/20-046_ceb00b98-e62a-45db-8d5f-
9793ffd0226e.pdf; Emily Ross, Song Ma, and Manju Puri, Private Equity and Financial Stability: Evidence from
Failed Bank Resolution in the Crisis, April 17, 2021, https://ssrn.com/abstract=3828789; and Edith Hotchkiss, Per
Stromberg, and David Smith, Private Equity and the Resolution of Financial Distress, July 7, 2021, https://ssrn.com/
abstract=1787446.
124 Companies turn to capital markets to raise funding from investors. This process is referred to as a securities offering.
Similar to public and private funds, public securities offerings are open to a wide range of investors and must meet
comprehensive registration requirements imposed by the SEC, whereas private securities offerings are exempt from
certain SEC registration requirements and face investor access restrictions. For more on public and private securities
offerings and funds, see CRS Report R45957, Capital Markets: Asset Management and Related Policy Issues, by Eva
Su; and CRS Report R45221, Capital Markets, Securities Offerings, and Related Policy Issues, by Eva Su.
125 SEC Chair Gary Gensler, “Statement on Proposed Joint Amendment to Form PF,” August 10, 2022,
https://www.sec.gov/news/statement/gensler-statement-proposed-joint-amendments-form-pf-081022.
126 See, for example, Sen. Elizabeth Warren, “Warren, Baldwin, Brown, Pocan, Jayapal, Colleagues Reintroduce Bold
Legislation to Fundamentally Reform the Private Equity Industry,” press release, October 20, 2021,
https://www.warren.senate.gov/newsroom/press-releases/warren-baldwin-brown-pocan-jayapal-colleagues-reintroduce-
bold-legislation-to-fundamentally-reform-the-private-equity-industry.
127 Adrian Blundell-Wignall, “The Private Equity Boom: Causes and Policy Issues,” Organisation for Economic Co-
operation and Development, 2007, https://www.oecd.org/daf/fin/financial-markets/40973739.pdf.
128 For example, see background discussions in Sharjil Haque, “Do Private Equity Funds Over-Lever Portfolio
Companies?,” Duke Financial Economics Center FinReg Blog, September 13, 2021, https://sites.duke.edu/
thefinregblog/2021/09/13/do-private-equity-funds-over-lever-portfolio-companies.
129 U.S. Congress, House Committee on Financial Services, “America for Sale? An Examination of the Practices of
Private Funds,” hearing, 116th Cong., 1st sess., November 19, 2019, https://financialservices.house.gov/calendar/
eventsingle.aspx?EventID=404650.
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 Incentive allocation. PE funds provide equity and other incentives for portfolio
company managers and investment advisers managing the funds.130 Some
observers view certain investment fund manager incentives and fees as
potentially excessive, non-transparent, and rife with conflict-of-interest
concerns.131
 Exit strategy. PE firms exit their investments through mergers and acquisitions,
initial public offerings, or secondary offerings to other PE firms. They may seek
a partial exit through dividend recapitalizations, among other methods. Some
observers are concerned about certain PE exit strategies, such as dividend
recapitalizations, whereby portfolio companies borrow to pay dividends to equity
investors.132
SEC Proposed Rules
The SEC published two proposed rules in the first quarter of 2022 to reform the PE industry
through regulatory changes aimed at private fund advisers and Form PF disclosures.133 These
proposed amendments would generally affect all private funds, including PE. Many observers
predict that these reforms would transform PE regulatory philosophy and practice. The SEC’s
proposed private fund reform focuses on investor protection issues,134 and the Form PF reform
emphasizes systemic risk mitigation and financial stability concerns.135
For Further Information
For questions about PE, contact Eva Su, Analyst in Financial Economics.
Additional reading on PE and the asset management industry in general is available in:
CRS Report R47053, Private Equity and Capital Markets Policy, by Eva Su
CRS Report R45957, Capital Markets: Asset Management and Related Policy Issues, by Eva Su
Investment Advisory Services
Individual investors often seek investment advice from financial professionals regarding asset
allocation and securities transaction decisions. Investment adviser is a legal term that generally
refers to an individual or company that is registered with the SEC and is paid by clients to provide

130 Phillip Leslie and Paul Oyer, Managerial Incentives and Value Creation: Evidence from Private Equity, National
Bureau of Economic Research, Working Paper no. 14331, September 2008, https://www.nber.org/papers/w14331.
131 SEC, “Observations from Examinations of Investment Advisers Managing Private Funds,” June 23, 2020,
https://www.sec.gov/files/Private%20Fund%20Risk%20Alert_0.pdf.
132 Matthew Goldstein, “Private Equity Firms Are Piling On Debt to Pay Dividends,” New York Times, February 19,
2021, https://www.nytimes.com/2021/02/19/business/private-equity-dividend-loans.html.
133 SEC, “Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews,” 87 Federal
Register 16886-16977, March 24, 2022; and SEC, “Amendments to Form PF to Require Current Reporting and Amend
Reporting Requirements for Large Private Equity Advisers and Large Liquidity Fund Advisers,” 87 Federal Register
9106-9235, February 17, 2022.
134 SEC, “SEC Proposes to Enhance Private Fund Investor Protection,” press release, February 9, 2022,
https://www.sec.gov/news/press-release/2022-19.
135 SEC, “SEC Proposes Amendments to Enhance Private Fund Reporting,” press release, January 26, 2022,
https://www.sec.gov/news/press-release/2022-9.
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investment advice about securities transactions.136 For example, asset managers, investment
consultants, and financial planners are usually regulated in the United States as investment
advisers under the Investment Advisors Act of 1940 (IAA; P.L. 76-768).137 Financial advisers, or
other similar professional titles, may more broadly include brokers. While financial professionals
offering investment advisory services could hold different titles or register with different
regulators in more than one capacity, the essence of their service would normally include helping
clients with investment decisions.138
The investment advisory industry includes nearly 15,000 SEC-registered investment advisers
managing $128 trillion in assets from 65 million clients.139 The industry may also be growing in
importance as a growing number of future retirees face difficulties meeting their financial needs.
A 2022 industry survey shows that 51% of retired respondents’ current income is less than half of
their pre-retirement income.140 Around 95% of working respondents and 79% of retired
respondents view financial advice, counseling, and financial education as important (Figure 5).
Figure 5. The Importance of Financial Advice, Counseling, and Education

Source: CRS using data from Goldman Sachs.
Notes: Results from a survey of 1,566 individuals (967 working individuals and 599 retirees) who answered the
survey question “How important is it to receive financial help (education, advice, counseling) to successful y
manage your retirement savings/income and investments?” For more details, see Goldman Sachs, “Retirement
Survey and Insights Report 2022,” October 12, 2022, p. 17, https://www.gsam.com/content/gsam/us/en/
institutions/market-insights/gsam-insights/2022/retirement-survey-insights-2022.html.

136 15 U.S.C. §80b-2.
137 SEC staff of the Investment Adviser Regulation Office, Division of Investment Management, Regulation of
Investment Advisors by the SEC, March 2013, at https://www.sec.gov/about/offices/oia/oia_investman/rplaze-
042012.pdf.
138 SEC, Making Sense of Financial Professional Titles, https://www.sec.gov/files/ib_making_sense.pdf.
139 Investment Adviser Association, Investment Adviser Industry Snapshot 2022, https://investmentadviser.org/wp-
content/uploads/2022/06/Snapshot2022.pdf.
140 Goldman Sachs, “Retirement Survey and Insights Report 2022,” October 12, 2022, https://www.gsam.com/content/
gsam/us/en/institutions/market-insights/gsam-insights/2022/retirement-survey-insights-2022.html.
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The way in which some financial services professionals are compensated may give rise to
conflicts of interests if these professionals’ recommendations result in larger commissions or
otherwise benefit them.141 These potential conflicts could lead the professionals to make
recommendations that are not in the best interests of their clients. By contrast, some financial
services professionals have compensation structures that do not vary based on which products
clients choose. This type of compensation structure could help mitigate conflicts of interest.
A significant policy issue in investment adviser regulation is whether financial professionals are
effectively mitigating conflict-of-interest concerns and appropriately prioritizing their clients’
interests relative to their own. Although individual investors generally receive similar types of
investment advisory services to help them meet their goals, their point of contact for accessing
financial advice could be different. Some investors use investment management or brokerage
firms, while others receive financial education and advice from retirement account providers
retained by their employers. The SEC oversees registered investment advisors and broker-dealers
(together with FINRA). The Department of Labor (DOL), on the other hand, oversees retirement
accounts. Both agencies have established standards of care, described below, for mitigating
conflicts of interest facing broker-dealers, investment firms, and providers of retirement accounts.
This section discusses policy issues concerning these SEC and DOL initiatives.
Policy Issue: Broker-Dealers and Registered Investment Advisors—SEC
Fiduciary and Best Interest Standards
As discussed above, broker-dealer firms or their affiliated persons act as brokers when they
execute securities trades for their clients (and as dealers when they trade their own securities for
their own benefit). They must register with the SEC142 and must generally be members of and
comply with the rules and guidance of FINRA.143 In addition, broker-dealer sales personnel
(called registered representatives) register with their state securities regulators.144
Broker-dealers were traditionally subject to what is known as the suitability standard, which
required them to have a reasonable basis to believe that their recommendations are suitable for
particular customers.145 As of June 30, 2020, broker-dealers became subject to the newly
implemented Regulation Best Interest (Reg BI), which requires a more enhanced standard of care
for customers. (Reg BI is discussed in more detail below.)
Investment advisers include firms or persons who provide investment advice directly to their
clients. Clients include individuals and institutional investors, such as mutual funds and hedge
funds. Pursuant to the IAA, which regulates key aspects of the investment adviser industry,
advisers with more than $110 million in assets under management must register with the SEC.146

141 For example, because the commissions mutual funds pay can vary, financial professionals might have an incentive
to recommend mutual funds that pay larger commissions.
142 SEC, “Guide to Broker-Dealer Registration,” https://www.sec.gov/reportspubs/investor-publications/
divisionsmarketregbdguidehtm.html.
143 SEC, “Guide to Broker-Dealer Registration.”
144 FINRA, “Brokers,” https://www.finra.org/investors/brokers.
145 FINRA, “Suitability,” https://www.finra.org/rules-guidance/key-topics/suitability.
146 Assets under management refers to the total market value of the financial assets managed on behalf of a client. The
IAA regulates key aspects of investment advisers. For more information, see SEC, “The Laws That Govern the
Securities Industry,” https://www.sec.gov/Article/whatwedo.html#laws.
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States generally register and regulate investment adviser firms with between $25 million and
$110 million in assets under management.
Court rulings and SEC enforcement decisions have established that investment advisers owe
fiduciary duties to their retail clients.147 Under the fiduciary standard, advisers are generally
required to subordinate their own interests to those of their clients. Advisers must also eliminate
material conflicts of interest or disclose such conflicts. The fiduciary standard is thus more
rigorous than was the historical suitability standard for broker-dealers.148
That disparity may, however, have been reduced when the SEC approved a new standard of client
conduct and loyalty for broker-dealers known as Reg BI in June 2019. Reg BI went into effect in
June 2020 and, according to SEC officials, established a more stringent regime of broker-dealer
client conduct than did the suitability standard. Since Reg BI’s adoption, there has been a policy
debate over its merits. Proponents of Reg BI have argued that it reasonably reconciles the need
for an enhanced broker-dealer standard of client care with the need to preserve the generally
beneficial broker-dealer business model. Opponents, however, argue that the reform preserves
what they view as the inadequate customer protections of the suitability standard.
The SEC’s Regulation Best Interest Reform
On June 5, 2019, the SEC approved a package of final regulatory rules related to the duty of care
financial professionals owe to retail investors (that went into effect on June 30, 2020).149 The
package involved both new rules and amendments under the IAA and the Securities Exchange
Act of 1934. It contained (1) Reg BI, which established a “best interest” standard of conduct for
broker-dealers who are giving securities recommendations to retail investors; (2) the Form
Customer Relationship Summary (a short-form disclosure that would identify key distinctions in
the types of services offered by broker-dealers and investment advisers to their clients, applicable
legal standards, and potential conflicts of interest); (3) a clarification of the fiduciary duty owed
by investment advisers to their clients under the IAA; and (4) an interpretation of the “solely
incidental” broker-dealer exclusion under the IAA aimed at clarifying when a broker-dealer’s
exercise of investment advisory activities redefines it as an investment adviser under the IAA.150
Reg BI is meant to “enhance the broker-dealer standard of conduct beyond existing … obligations
[by] requiring broker-dealers … to: (1) act in the best interest of the retail customer at the time the
recommendation is made, without placing the financial or other interest of the broker-dealer
ahead of the interests of the retail customer; and (2) address [various broker-dealer] conflicts of
interest” with those clients.151
The SEC and various business groups argued that Reg BI properly balances the need for an
enhanced broker-dealer standard of care with the need to preserve the broker-dealer business

147 For more details, see CRS Report R46115, Regulation Best Interest (Reg BI): The SEC’s Rule for Broker-Dealers,
by Gary Shorter.
148 SEC, Commission Interpretation Regarding Standard of Conduct for Investment Advisers, June 5, 2019,
https://www.sec.gov/rules/interp/2019/ia-5248.pdf.
149 SEC, “SEC Adopts Rules and Interpretations to Enhance Protections and Preserve Choice for Retail Investors in
Their Relationships with Financial Professionals,” press release, June 5, 2019, https://www.sec.gov/news/press-release/
2019-89. SEC, “Regulation Best Interest: The Broker-Dealer Standard of Conduct,” 84 Federal Register 33318-33492,
July 12, 2019.
150 SEC, “SEC Adopts Rules and Interpretations.”
151 SEC, “Proposed Regulation Best Interest,” 83 Federal Register 21574, May 9, 2018.
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model, a model deemed to have special appeal to less-affluent investors.152 Critics have
contended that the reform effectively preserves what they characterized as an inadequate
suitability standard, exposing investors to harm from unaddressed broker-dealer conflicts of
interest.153 Some Members of Congress have thus proposed draft legislation to rescind Reg BI.154
Reg BI continued to face challenges after its implementation. A study released in November 2021
by the North American Securities Administrators Association, a group of state and provincial
securities regulators, found that many broker-dealers were putting their own financial interests
ahead of their retail customers in violation of Reg BI.155 FINRA’s February 2022 report on its
first full year of assessing broker-dealer compliance with Reg BI found issues relating to
procedures and compliance.156 In September 2022, SEC officials reported that they expected to
conduct broker-dealer examinations during the coming year to help the agency ascertain how well
the industry had adapted to the Reg BI requirements.157 Meanwhile, some have raised concerns
that Reg BI gives some clients the false impression that brokers and investment advisers are
interchangeable, notwithstanding the fact that only advisers owe fiduciary duties to their
clients.158
For Further Information
For questions about SEC financial advice standards of care, contact Gary Shorter, Specialist in
Financial Economics.
Additional reading on Regulation Best Interest is available in CRS Report R46115, Regulation
Best Interest (Reg BI): The SEC’s Rule for Broker-Dealers, by Gary Shorter.

152 For example, see SEC, Regulation Best Interest: The Broker-Dealer Standard of Conduct. Final Rule, June 5, 2019,
pp. 20-22, https://www.sec.gov/rules/final/2019/34-86031.pdf; and “Letter from Kenneth Bentsen, Jr., President and
CEO of SIFMA, to Members of the U.S. House of Representatives Re: Waters Amendment #78 on Reg BI,” June 25,
2019, https://www.sifma.org/resources/submissions/waters-amendment-78-on-reg-bi/.
153 Statement by SEC Commissioner Robert J. Jackson, “Final Rules Governing Investment Advice,” June 5, 2019,
https://www.sec.gov/news/public-statement/statement-jackson-060519-iabd; and Sarah O’Brien, “SEC’s New Investor
Protection Rule Won’t End the Fiduciary Debate,” CNBC, July 30, 2019, https://www.cnbc.com/2019/07/30/sec-new-
investor-protection-rule-wont-end-the-fiduciary-debate.html.
154 For example, on June 26, 2019, during the 116th Congress, the House passed H.R. 3351, the Financial Services and
General Government Appropriations Act, 2020, which included appropriations for the SEC. The bill included an
amendment sponsored by Chair Waters that said: “None of the funds made available by this Act may be used by the
Securities and Exchange Commission to implement, administer, enforce, or publicize the final rules and interpretations
of the Securities and Exchange Commission titled Regulation Best Interest: The Broker-Dealer Standard of Conduct.”
U.S. Congress, House Committee on Financial Services, “Dear President Elect Biden,” December 4, 2020,
https://financialservices.house.gov/uploadedfiles/120420_cmw_ltr_to_biden.pdf.
155 North American Securities Administrators Association, Report and Findings of NASAA’s Regulation Best Interest
Implementation Committee National Examination Initiative Phase II, November 2021, https://www.nasaa.org/wp-
content/uploads/2021/11/NASAA-Reg-BI-Phase-II-A-Report-November-2021_FINAL.pdf.
156 FINRA, “2022 Report on FINRA’s Examination and Risk Monitoring Program,” February 9, 2022,
https://www.finra.org/rules-guidance/guidance/reports/2022-finras-examination-and-risk-monitoring-program.
157 Tracy Longo, “SEC Exams Will Focus on Reg-BI Compliance, Agency Officials Say,” FA Magazine, September 9,
2022, https://www.fa-mag.com/news/sec-exams-will-focus-on-reg-bi-compliance—agency-officials-say-69612.html.
On June 6, 2021, in its first Reg-BI-related enforcement, the SEC charged broker-dealer Western International
Securities and five of its registered representatives and brokers with violating Reg BI when they recommended and sold
an unrated, high-risk debt security known as L Bonds to retirees and other retail investors. SEC, “SEC Charges Firm
and Five Brokers with Violations of Reg BI,” press release, June 6, 2021, https://www.sec.gov/news/press-release/
2022-110.
158 Longo, “SEC Exams Will Focus on Reg-BI Compliance.”
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Policy Issue: Pension and Retirement Accounts—DOL Fiduciary Standards
A pension is a voluntary benefit offered by employers to assist employees in providing for their
financial security in retirement.159 The two types of pension plans that employers can offer are
defined contribution (DC) plans, in which participants have individual accounts that can provide
income in retirement, and defined benefit (DB) plans, in which participants receive regular
monthly benefit payments in retirement (which some refer to as a “traditional” type of
pension).160
Some employers sponsor both types of pension plans for their employees, though most sponsor
either one type or the other.161 Most private sector employers that sponsor pension plans offer DC
plans, of which the 401(k) plan is the most common. Pension discussions also frequently include
Individual Retirement Accounts (IRAs), which are tax-advantaged accounts for individuals to
save for retirement outside of employer-sponsored plans. Often, individuals who have savings in
DC plans or receive lump sum payments from DB plans roll over their savings to IRAs at job
change or retirement.
Retirement plans are complex, and both employers and plan participants often rely on financial
services professionals to assist them with their decisionmaking. For example, an employer might
seek assistance in determining which investments to offer in a DC plan it has established. A
participant in a DC plan might seek assistance in choosing investments from among the options
offered by the plan or advice on whether to roll over a 401(k) balance into an IRA or another
employer’s DC plan upon job change or retirement.
To protect the financial interests of private sector pension plan participants and beneficiaries,
Congress passed the Employee Retirement Income Security Act of 1974 (ERISA; P.L. 93-406).
ERISA is codified in the U.S. Code in Title 26 (Internal Revenue Code) and Title 29 (Labor
Code). Individuals who transact with pension plans may be required to meet certain standards as
found in pensions and securities laws and regulations. The standard that applies depends on the
individuals’ roles and the actions they are taking.
Fiduciary Duty Under ERISA
ERISA Section 3(21)(A) provides that a person is a fiduciary to the extent that the person:
 exercises any discretionary authority or control with respect to the management
of the plan or exercises any authority with respect to the management or
disposition of plan assets,
 renders investment advice for a fee or other compensation with respect to any
plan asset or has any authority or responsibility to do so, or

159 For an overview of pensions, see CRS Report R47119, Pensions and Individual Retirement Accounts (IRAs): An
Overview, coordinated by Elizabeth A. Myers.
160 In some DC plans, plan participants have the option to purchase annuities (a monthly payment for life) with some or
all of their account balances. In some DB plans, plan participants have the option to receive a lump-sum payment at
retirement in lieu of the annuity.
161 In March 2021, 12% of private sector workers had access to both DB and DC plans, 3% had access to DB plans
only, and 53% had access to DC plans only. See DOL, National Compensation Survey: Employee Benefits in the
United States, March 2021, September 2021, https://www.bls.gov/ncs/ebs/benefits/2021/employee-benefits-in-the-
united-states-march-2021.pdf.
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 has any discretionary responsibility in the administration of the plan.162
An individual who is a fiduciary is required, among other duties, to “discharge his duties with
respect to a plan solely in the interest of the participants and beneficiaries.”163 ERISA identifies
four standards of conduct: (1) a duty of loyalty, (2) a duty of prudence, (3) a duty to diversify
investments, and (4) a duty to follow plan documents to the extent that they comply with
ERISA.164
ERISA Section 3(21)(a) governs the circumstances in which a person qualifies as a fiduciary. One
of these circumstances, in which an individual renders investment advice for a fee or other
compensation, is the subject of a 1975 DOL regulation that created a five-part test to determine
whether an individual provided investment advice and thus was subject to the fiduciary
standard.165
To be held to the 1975 fiduciary standard with respect to his or her advice, each of the following
five elements must hold: (1) an individual must make recommendations on investing in,
purchasing, or selling securities or other property or give advice as to the value, and the
recommendations must (2) be made on a regular basis, (3) be pursuant to a mutual understanding
that the advice (4) will serve as a primary basis for investment decisions and (5) be individualized
to the particular needs of the plan regarding such matters as, among other things, investment
policies or strategy, overall portfolio composition, or diversification of plan investments. An
investment professional is not treated as a fiduciary unless each of the five elements of the test is
satisfied for each instance of advice.
In December 2020, DOL issued a prohibited transaction exemption (PTE 2020-02) to ensure that
fiduciaries, such as financial institutions and investment professionals, can continue to receive
compensation, such as commissions, that would otherwise be prohibited.166 In addition, PTE
2020-02 noted that recommendations about whether to roll over balances from pension plans to
IRAs could be investment advice if the relationship between the advisor and client was, or was

162 See ERISA §3(21)(A).
163 ERISA §404(a).
164 ERISA §§404(a)(1)(A)-404(a)(1)(D). For more information on a fiduciary’s duty to monitor a plan’s investments,
see CRS Legal Sidebar LSB10636, Supreme Court Rules on Retirement Plan Fiduciary Duty in Hughes v.
Northwestern University.
165 In 2016, DOL issued a rule that replaced the five-part test with a broader definition of investment advice. The
rationale for the rule included the inadequacy of the existing rule to address DC plans, which an increasing number of
workers have had since the 1975 test was issued, and the enforcement challenges DOL had with demonstrating that an
individual met each element of the five-part test. See DOL, Regulating Advice Markets, April 2016,
https://www.dol.gov/sites/dolgov/files/ebsa/laws-and-regulations/rules-and-regulations/completed-rulemaking/1210-
AB32-2/ria.pdf. However, the 2016 rule was vacated by the courts and the five-part test was restored. See Employee
Benefits Security Administration, “Conflict of Interest Rule—Retirement Investment Advice: Notice of Court
Vacatur,” 85 Federal Register 40589-40594, July 7, 2020, https://www.govinfo.gov/content/pkg/FR-2020-07-07/pdf/
2020-14260.pdf; and Employee Benefits Security Administration, “Prohibited Transaction Exemption 2020-02,
Improving Investment Advice for Workers and Retirees,” 85 Federal Register 82798-82866, https://www.govinfo.gov/
content/pkg/FR-2020-12-18/pdf/2020-27825.pdf.
166 An investment advice fiduciary would generally be unable to receive compensation, such as commissions, if the
compensation varied based on the investment recommendations. See Employee Benefits Security Administration,
“Prohibited Transaction Exemption 2020-02, Improving Investment Advice for Workers and Retirees,” 85 Federal
Register 82798-82866, https://www.govinfo.gov/content/pkg/FR-2020-12-18/pdf/2020-27825.pdf.
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expected to be, ongoing.167 The best interest standard in PTE 2020-02 is “broadly aligned” with
the SEC’s Reg BI standards.168
In its Spring 2022 Regulatory Agenda, DOL indicated that it would amend the definition of
fiduciary “to take into account practices of investment advisers, and the expectations of plan
officials and participants, and IRA owners who receive investment advice, as well as
developments in the investment marketplace.”169
For Further Information
For questions about DOL fiduciary standard, contact John Topoleski, Specialist in Income
Security.
Additional reading on DOL fiduciary standards for investment advice is available in:
CRS Report R44884, Department of Labor’s 2016 Fiduciary Rule: Background and Issues, by
John J. Topoleski and Gary Shorter
CRS In Focus IF10686, DOL’s 2016 Fiduciary Rule on Investment Advice, by John J. Topoleski
Environmental, Social, and Governance (ESG) Investing
ESG investing refers to an investment process that incorporates environmental, social, and
governance factors into asset allocation and risk-taking decisions that are often aligned with
social values, sustainability, and climate-related objectives.170 The emergence of the ESG trend
corresponded to increased inquiries by investors, policymakers, and civil society stakeholders
toward sustainable finance and tailored financial products that are more reflective of ESG goals.
Global institutional investors indicate in at least one survey that they are receptive to ESG
investing. Around 90% of global investors surveyed by a large asset manager indicated that they
either found the ESG strategy central to their investment approaches or have considered or
applied ESG investing as part of their investment approaches (Figure 6). As shown by the survey,
Europe leads the ESG investing adoption rate globally. In North America, 18% of the respondents
say that ESG is central to their investment approaches, 30% of the respondents apply ESG
investing in their investment approaches, and 31% of the respondents are considering ESG.

167 See Employee Benefits Security Administration, New Fiduciary Advice Exemption: PTE 2020-02 Improving
Investment Advice for Workers and Retirees Frequently Asked Questions, April 2021, https://www.dol.gov/agencies/
ebsa/about-ebsa/our-activities/resource-center/faqs/new-fiduciary-advice-exemption.
168 See DOL, Employee Benefits Security Administration, “Prohibited Transaction Exemption 2020-02, Improving
Investment Advice for Workers & Retirees,” 85 Federal Register 82801, December 18, 2020; and SEC, Commission
Interpretation Regarding Standard of Conduct for Investment Advisers, June 5, 2019, https://www.sec.gov/rules/interp/
2019/ia-5248.pdf.
169 See RIN: 1210-AC02, Definition of the term “Fiduciary,” https://www.reginfo.gov/public/do/eAgendaViewRule?
pubId=202204&RIN=1210-AC02.
170 Organisation for Economic Co-operation and Development, ESG Investing: Practices, Progress and Challenges,
2020, http://www.oecd.org/finance/ESG-Investing-Practices-Progress-and-Challenges.pdf.
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Figure 6. Global ESG Investing Adoption Levels

Source: Capital Group.
Notes: Results from a survey of 1,130 global institutional investors (conducted between February and March
2022) who answered the question, “Which of the fol owing statements best describes your organization’s overall
stance on ESG investing? (Select one answer.)” Data may not equal 100% due to rounding. For more details, see
Capital Group, ESG Global Study 2022, https://www.capitalgroup.com/advisor/pdf/shareholder/ITGEOT-028-
658081.pdf.
Many policy debates surrounding ESG investing center around SEC actions that established new
ESG-specific mandatory compliance frameworks for issuers and funds for the first time. Affected
stakeholders are sharing their perspectives about the potential impact of these new regulatory
frameworks. This section covers the SEC’s proposed climate disclosure rule and investment
management company ESG compliance requirements in more detail.
Policy Issue: The SEC’s Proposed Climate Disclosure Rule
In light of public concern over climate change, some stakeholders have asked to what extent
publicly traded companies should disclose their climate-related risks. The SEC requires publicly
traded companies to disclose financial statements and certain other relevant business information
in public filings, including annual and quarterly reports. While current SEC requirements do not
address climate-related risks expressly, publicly traded companies must disclose such risks if they
are “material” under federal securities laws.171
Numerous organizations, shareholder groups, businesses, and financial regulators have
recognized financial risks that climate change may pose to companies. Such climate-related risks
commonly fall into two general categories:
Physical risks: These risks include direct and indirect risks arising from extreme weather events
and from longer-term shifts in climate patterns, including, for example, changes in water
availability and food security. Physical risks have important implications for many companies’
physical facilities, operations, transportation costs, supply chains, and employees.

171 In Basic, Inc. v. Levinson, 485 U.S. 224 (1988), the Supreme Court explained that a fact is “material” if there is a
“substantial likelihood” that a reasonable shareholder would find its omission to alter the total mix of available
information significantly.
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Transition risks: These risks arise from policy, legal, technology, and market changes as the
world transitions to a lower-carbon economy, with potential financial or reputational effects on
businesses. For example, a company may engage in efforts to reduce greenhouse gas (GHG)
emissions or otherwise respond to changing consumer behavior.172
Although financial regulators have not traditionally focused on climate change, some financial
regulators, including the SEC, have begun to consider the economic impact of climate-related
changes and published proposals to address climate-related risks.173
SEC Proposed Rule
On March 21, 2022, the SEC proposed climate-related disclosure rules for public companies.174
The proposal represents a more prescriptive and detailed approach to climate-related disclosures
relative to the existing broad, principles-based climate-related disclosure regime embodied in the
SEC’s 2010 “Guidance Regarding Disclosure Related to Climate Change.”175 Among other
things, it would require all public companies, as a growing number voluntarily do, to report on
their direct GHG emissions and under certain circumstances their upstream and downstream
GHG emissions. If adopted, the disclosure requirements would direct domestic or foreign SEC
registrants to include climate-related information in their registration statements, such as Form S-
1, and their periodic reports, such as Form 10-K. The proposed disclosures can be divided into
four broad types: climate-related risks, GHG emissions, targets and goals, and audited financial
statement disclosures.
Public companies would also be required to report on the impacts of climate-related natural
events and transitional activities to mitigate such impacts on their consolidated financial
statements. According to the SEC, both the current and proposed disclosure regimes are grounded
in the federal securities laws’ concept of materiality—the notion that required disclosures should
encompass the types of information that investors consider important when they make investment
or corporate voting decisions.176
Some SEC commissioners say that the current voluntary reporting protocol has often resulted in
incomplete and inconsistent significant climate-related disclosures due to differences in

172 For more on climate-related risk drivers, see Basel Committee on Banking Supervision, Climate-Related Risk
Drivers and Their Transmission Channels, April 2021, https://www.bis.org/bcbs/publ/d517.pdf.
173 See CRS In Focus IF11307, Climate-Related Risk Disclosure Under U.S. Securities Laws, by Eva Su and Nicole
Vanatko.
174 SEC, “The Enhancement and Standardization of Climate-Related Disclosures for Investors,” 87 Federal Register
21334-21473, April 11, 2022. The timeline for finalizing the rule has faced delays, and the SEC is reportedly
considering the options to scale back the proposal. Declan Harty, “SEC’s Gensler Weighs Scaling Back Climate Rule
as Lawsuits Loom,” Politico, February 4, 2023, https://www.politico.com/news/2023/02/04/sec-climate-rule-scale-
back-00081181.
175 SEC, “Commission Guidance Regarding Disclosure Related to Climate Change,” 75 Federal Register 6289-6297,
February 8, 2010.
176 For example, SEC Chair Gary Gensler noted, “In making decisions about disclosure requirements under the federal
securities laws—including decisions about today’s climate-related disclosures—I am guided by the concept of
materiality. As the Supreme Court has explained, information is material if ‘there is a substantial likelihood that a
reasonable shareholder would consider it important’ in making an investment or voting decision, or if it would have
‘significantly altered the total mix of information made available.’” SEC Chair Gary Gensler, “Statement on Proposed
Mandatory Climate Risk Disclosures,” March 21, 2022, https://www.sec.gov/news/statement/gensler-climate-
disclosure-20220321. SEC, “The Enhancement and Standardization of Climate-Related Disclosures for Investors,” 87
Federal Register 21334-21473, April 11, 2022.
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methodology and in assessing what is material.177 Various investors and observers have said that
these shortcomings have compromised the complete disclosure of the financial risks related to
climate change.178 Further, according to some SEC officials, the proposed rules are aimed at
addressing such perceived drawbacks of the voluntary framework.179
Other SEC commissioners, however, have argued that the current reporting protocol has generally
resulted in firms consistently reporting materially significant climate-related impacts.180 They also
asserted that the proposed rules go beyond the SEC’s statutory authority, will not result in
consistent and comparable inter-firm reporting due to unreliable data and modeling based on
potentially speculative assumptions, and discard the materiality qualifier for some disclosures
while employing an overly expansive definition of materiality for others.181
At the time of the vote, SEC Chair Gary Gensler remarked, “Today’s proposal would help issuers
more efficiently and effectively disclose [climate risks] … and meet investor demand, as many
issuers already seek to do.”182 Some environmental groups have supported such measures based
on similar arguments. For example, the Environmental Defense Fund said that, if finalized, the
rules would “help investors price climate risks accurately and allocate capital prudently and
efficiently through access to comparable specific, and decision-useful climate risk
information.”183
Echoing a common criticism of the proposal, the U.S. Chamber of Commerce asserted that “the
prescriptive approach taken by the SEC will limit companies’ ability to provide information that
shareholders and stakeholders find meaningful while at the same time requiring that companies
provide information in securities filings that are not material to investors.”184
Climate-related risks. The proposal includes a number of provisions that involve nonfinancial
disclosures surrounding corporate climate-related risks. They are modeled in part after the
recommendations of the Task Force for Climate-Related Disclosures—a group of financial
experts created by the Financial Stability Board.185 They also draw from the Greenhouse Gas

177 See, for example, SEC Commissioner Allison Herren Lee, “A Climate for Change: Meeting Investor Demand for
Climate and ESG Information at the SEC,” March 15, 2021, https://www.sec.gov/news/speech/lee-climate-change.
178 See, for example, testimony of Steven M. Rothstein, Managing Director, Ceres Accelerator for Sustainable Capital
Markets, in U.S. Congress, Senate Climate Change Task Force, August 2, 2022, https://www.ceres.org/news-center/
blog/congressional-testimony-climate-disclosure-financial-disclosure.
179 See, for example, Herren Lee, “A Climate for Change.”
180 See, for example, SEC Commissioner Hester M. Peirce, “We Are Not the Securities and Environment
Commission—At Least Not Yet,” March 21, 2022, https://www.sec.gov/news/statement/peirce-climate-disclosure-
20220321.
181 Peirce, “We Are Not the Securities and Environment Commission.”
182 Gensler, “Statement on Proposed Mandatory Climate Risk Disclosures.”
183 Environmental Defense Fund, “Unpacking the Proposed SEC Rule on Climate Risk Disclosure,”
https://business.edf.org/insights/unpacking-the-proposed-sec-rule-on-climate-risk-disclosure/.
184 U.S. Chamber of Commerce, “U.S. Chamber Voices Concern with Prescriptive Approach of SEC Climate
Disclosures Proposal, Will Work with SEC to Develop Clear and Workable Rules,” March 21, 2022,
https://www.uschamber.com/finance/corporate-governance/u-s-chamber-voices-concern-with-prescriptive-approach-
of-sec-climate-disclosures-proposal-will-work-with-sec-to-develop-clear-and-workable-rules.
185 Task Force on Climate-Related Financial Disclosures, Recommendations of the Task Force on Climate-related
Financial Disclosures, June 15, 2017, https://assets.bbhub.io/company/sites/60/2021/10/FINAL-2017-TCFD-
Report.pdf.
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Protocol, a global initiative that provides standards for business and government to monitor GHG
emissions.186 These provisions would require a covered company to disclose:
 a description of its climate-related risks and relevant risk management processes;
 how identified climate-related risks have had or are likely to have a material
impact on its business and financial statements during the short, medium, or long
term;
 how identified climate-related risks have affected or are likely to affect its
strategy, business model, capital allocation, financial planning, and outlook;
 how climate-related events (including severe weather events and other natural
conditions) and transition activities (to help mitigate or adapt to climate-related
risks) would impact the line items of its consolidated financial statements, as well
as the financial estimates and assumptions used in the statements;
 its estimated cost of carbon emissions (if it uses an internal carbon price) and
information about that estimate and how it is formulated; and
 information that enables investors to understand those aspects of its climate risk
management strategy (if the firm has undertaken scenario analysis, developed
transition plans, or publicly issued climate-related targets or goals).187
GHGs. Under the proposal, firms would generally be required to disclose their direct GHG
emissions from operations that they own or control (Scope 1 emissions) and indirect GHG
emissions from purchased electricity and other forms of energy (Scope 2). They would also be
required to describe the methodology, significant inputs, and assumptions used for their
calculations. For both, the disaggregated constituent GHG emissions would also have to be
disclosed.188
Firms would also be required to disclose their Scope 3 emissions if they deem them material or
have established GHG emissions targets or goals. Scope 3 emissions are a consequence of a
firm’s activities but derive from its upstream and downstream activities, which may be neither
owned nor controlled by it. Examples of Scope 3 emissions include emissions associated with the
production and transportation of goods, purchases from third parties, employee commuting or
business travel, waste generation, the processing or use of the registrant’s products by third
parties, the processing of sold products, the use of sold products, franchises, and investments. The
required reporting of Scope 3 emissions has been one of the most significant aspects of the
proposal.
The proposal provides for a “safe harbor” that would shield firms from legal liability under the
federal securities laws for their Scope 3 reporting if done in good faith. It would also exempt
smaller reporting companies from Scope 3 disclosure requirements.
Targets and goals. If a firm has publicly established climate-related targets or goals, the proposal
would require it to disclose a number of related items. Among them are (1) the scope and time
horizon for the targeted activities and emissions, (2) how the targets will be met, and (3) data that
tracks progress toward the goals.189

186 Greenhouse Gas Protocol, “Standards,” https://ghgprotocol.org/standards.
187 SEC, The Enhancement and Standardization of Climate-Related Disclosures for Investors, Release Nos. 33-11042,
34-94478, File No. S7-10-22 (Mar. 21, 2022), p. 42, https://www.sec.gov/rules/proposed/2022/33-11042.pdf.
188 SEC, The Enhancement and Standardization of Climate-Related Disclosures for Investors, p. 147.
189 SEC, The Enhancement and Standardization of Climate-Related Disclosures for Investors, p. 266.
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For Further Information
For questions about climate disclosure and climate-related financial risk, contact Rena Miller,
Specialist in Financial Economics, or Gary Shorter, Specialist in Financial Economics.
For questions about SEC disclosure in general, contact Eva Su, Analyst in Financial Economics.
Additional reading on climate disclosure and the SEC disclosure requirements is available in:
CRS Report R46766, Climate Change Risk Disclosures and the Securities and Exchange
Commission, by Rena S. Miller, Gary Shorter, and Nicole Vanatko
CRS In Focus IF12108, Overview of the SEC Climate Risk Disclosure Proposed Rule, by Gary
Shorter and Rena S. Miller
CRS In Focus IF11307, Climate-Related Risk Disclosure Under U.S. Securities Laws, by Eva Su
and Nicole Vanatko
CRS In Focus IF11256, SEC Securities Disclosure: Background and Policy Issues, by Eva Su
Policy Issue: Investment Manager ESG Compliance
ESG funds are funds that consider ESG factors in investment decisionmaking. Investor interest in
such funds has grown considerably over the years. For example, according to Morningstar, which
tracks fund data, domestic ESG funds had $357 billion in assets at the end of 2021, more than
four times the total amount held three years earlier.190 ESG funds’ increased popularity indicates
that they may have fulfilled an apparent investor demand.
Although ESG funds provide investors with opportunities to align their investments with personal
values and expected long-term returns, they face challenges regarding their lacking of clarity
about what the funds are actually doing. One example relates to the existence of “greenwashing,”
a form of company or fund operations that market their products or brand under the label of
“green” or ESG without substantive efforts to ensure the related outcome, thus overstating their
ESG impact while potentially misleading investors and the public.191
For years, various outside observers and some SEC officials raised concerns over allegedly
confusing relationships between some fund names, especially environmentally oriented ones, and
the fund investment strategies.192 Fund names are largely governed by the “Names Rule” (Rule
35d-1 pursuant to the Investment Company Act) adopted by the SEC in 2001. Rule 35d-1 requires
that at least 80% of the assets of certain funds with a name suggesting a focus on particular types
of investment (e.g., industries, nations, regions) must be invested in those types of assets.

190 Andrew Shilling, “This Is the Best-Performing Sustainable Fund over the Past 5 Years—and It Had a Return of
More Than 30%,” Market Watch, October 1, 2022, https://www.marketwatch.com/picks/this-is-the-best-performing-
major-sustainable-fund-over-the-past-5-years-and-it-had-a-return-of-more-than-30-01664391557.
191 For more on greenwashing, see KPMG, “ESG: Addressing Greenwashing in Financial Services,” 2022,
https://home.kpmg/xx/en/home/insights/2022/04/esg-addressing-greenwashing-in-financial-services.html.
192 For example, see SEC Commissioner Elad Roisman, “Keynote Speech at the Society for Corporate Governance
National Conference,” July 7, 2020, https://www.sec.gov/news/speech/roisman-keynote-society-corporate-governance-
national-conference-2020; SEC Chair Gary Gensler, “Prepared Remarks Before the Asset Management Advisory
Committee,” July 7, 2021, https://www.sec.gov/news/speech/gensler-amac-2021-07-07; and Mariana Lemann,
“Regulators Put ESG Fund Names Under the Microscope,” Financial Times, October 17, 2021, https://www.ft.com/
content/126c9502-9400-4bac-a073-2d76ef2f55a7.
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According to some reports, the SEC staff has often taken the position that terms such as ESG or
sustainable in a fund name trigger the rule’s requirement.193
Responding to changing conditions surrounding the industry, on May 25, 2022, the SEC proposed
two rules to amend how investment fund names are governed and to enhance ESG fund
disclosure. These proposals have generated debate. This section explains both proposals.
SEC Proposed Rule on Fund Names
On May 25, 2022, the SEC commissioners proposed amendments to its “Names Rule” governing
certain investment fund names. If adopted as proposed, the reform would require SEC-registered
funds to reassess their fund names, investment policies mandated under the Names Rule, and
related fund prospectus disclosures. Major parts of the proposal include rules that would (1)
expand the 80% investment requirement to any fund whose name suggests a focus on particular
characteristics, such as ESG factors; (2) require a fund to use a derivatives instrument’s notional
amount, rather than its market value, to determine the fund’s compliance with the 80%
requirement; (3) allow for temporary departures from the 80% requirement, such as during
sudden changes in the market value of a fund’s underlying investments; (4) prohibit a registered
closed-end fund or a business development company whose shares are not listed on a national
securities exchange from changing its 80% investment policy unless fund shareholders vote to do
so; (5) provide enhanced information to investors and the SEC on how fund names track a fund’s
investments; and (6) prohibit integration funds—a type of fund that considers ESG factors
alongside but not more than other non-ESG factors—from using ESG or similar terminology in
its name.194
SEC Proposed Rule on Investment Manager ESG Disclosure
The SEC does not have rules that specifically govern ESG disclosures. Rather, the SEC has
explained that different funds and advisers have adopted varying definitions of ESG investing.
The commission has argued that the absence of a common ESG disclosure framework makes it
difficult for investors to understand the investment policies behind particular ESG strategies.195
Based on these concerns, the SEC issued a proposed rule in May 2022 that would mandate
various disclosures for certain investment companies and investment advisers that purport to
employ ESG strategies.196 The proposed rule would direct funds and investment advisors that
claim to incorporate one or more ESG factors to disclose (1) how ESG factors play a role in their
portfolio investment selection procedures and (2) how ESG factors are integrated into their
investment strategies.197
For Further Information
For questions on investment manager ESG compliance, contact Gary Shorter, Specialist in
Financial Economics.

193 Jacob Wolinsky, “How ESG Funds Will Be Impacted by the SEC’s Expansion of the 80 Percent Names Rule,”
Forbes, October 6, 2022, https://www.forbes.com/sites/jacobwolinsky/2022/10/06/how-esg-funds-will-be-impacted-
by-the-secs-expansion-of-the-80-percent-names-rule.
194 SEC, “Amendments to the Fund ‘Names Rule,’” May 25, 2022, https://www.sec.gov/files/ic-34593-fact-sheet.pdf.
195 SEC, “ESG Disclosures for Investment Advisers and Investment Companies,” May 25, 2022, https://www.sec.gov/
files/ia-6034-fact-sheet.pdf.
196 SEC, “Investment Company Names,” 87 Federal Register 36594-36651, June 17, 2022.
197 SEC, “ESG Disclosures for Investment Advisers and Investment Companies.”
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Additional reading on ESG names rule and investment manager ESG disclosure is available in:
CRS In Focus IF12226, Environmental, Social, and Governance Funds: SEC Proposed Names
Rule Reform, by Gary Shorter
CRS In Focus IF12228, Environmental, Social and Governance Funds: SEC-Proposed
Disclosure Reform, by Gary Shorter
CRS In Focus IF11716, Introduction to Financial Services: Environmental, Social, and
Governance (ESG) Issues, by Raj Gnanarajah and Gary Shorter
Digital Assets
In recent years, financial innovation in capital markets has fostered a new asset class—digital
assets—and introduced new forms of fundraising and trading. The Infrastructure Investment and
Jobs Act defines digital asset as any digital representation of value that is recorded on a
cryptographically secured distributed ledger technology (DLT) or any similar technology as
specified by the Treasury Secretary.198 Sometimes, the term digital asset has been used
interchangeably to refer to crypto-assets, cryptocurrencies,199 or digital tokens.200 Some financial
authorities separate crypto-assets from digital assets, using the term digital asset to refer to two
categories of products—crypto-asset and central bank digital currency.201 This section follows this
terminology by using crypto-asset generally to describe private sector digital assets that are
enabled using cryptography and DLT.202
The crypto-asset market includes around 10,000 tokens totaling around $1 trillion as of October
2022.203 The two largest tokens—Bitcoin and Ether—represent more than half of the total
value.204 At the previous market peak in November 2021, the market capitalization of all
cryptocurrencies reached $3 trillion.
Crypto-assets generally face higher risk and price volatility than traditional assets do. Some
crypto-asset risk factors are commonly seen in the traditional financial world (e.g., credit, market,
operational, and systemic risks), while others are more amplified because of the nature of crypto
operations (e.g., cybersecurity, illicit activities, and market transparency). Some observers believe
that digital assets have already experienced more substantial price volatility relative to other asset
classes that emerged during the past 50 years.205
Institutional investors, who are perceived as more sophisticated and more able to dedicate
resources toward investment research, have shown increased interest in crypto-assets in recent

198 P.L. 117-58. “Except as otherwise provided by the Secretary, the term ‘digital asset’ means any digital
representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology as
specified by the Secretary.”
199 For more on cryptocurrency, see CRS Report R47425, Cryptocurrency: Selected Policy Issues, by Paul Tierno.
200 Board of the International Organization of Securities Commissions, Issues, Risks and Regulatory Considerations
Relating to Crypto-Asset Trading Platforms, May 2019, https://www.iosco.org/library/pubdocs/pdf/IOSCOPD627.pdf.
201 Financial Stability Oversight Council, Report on Digital Asset Financial Stability Risks and Regulation, 2022,
https://home.treasury.gov/system/files/261/FSOC-Digital-Assets-Report-2022.pdf.
202 For more on blockchain and DLT, see CRS Report R47064, Blockchain: Novel Provenance Applications, by Kristen
E. Busch.
203 CoinMarketCap, “Global Crypto Currency Charts,” https://coinmarketcap.com/charts.
204 CoinMarketCap, “Today’s Cryptocurrency Prices by Market Cap,” https://coinmarketcap.com.
205 J. P. Morgan Global Research, Digital Transformation and the Rise of Fintech: Blockchain, Bitcoin and Digital
Finance 2021, February 18, 2021, p. 23, https://www.tbstat.com/wp/uploads/2021/02/JPM_Bitcoin_Report.pdf.
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years. The factors that have previously discouraged institutional investors from investing in
crypto-assets reportedly include market manipulation, price volatility, valuation challenges,
cybersecurity, and regulatory uncertainty surrounding SEC securities regulation.206
The $1 trillion crypto-asset market is a fraction of the $100 trillion traditional capital markets, but
events in the crypto market have the potential to amplify shocks and create disruptions in
interrelated parts of the financial system. Financial regulators, including the SEC, have identified
the need to monitor market developments comprehensively and mitigate potential risks to
investors and the financial system.
Policy Issue: SEC Digital Asset Jurisdiction
The current regulatory landscape for digital assets (or crypto-assets) is fragmented. Multiple
agencies apply different regulatory approaches to crypto-assets at the federal and state levels. For
example, the SEC treats some crypto-assets as “securities,” and the CFTC treats some crypto-
assets as “commodities.”207 State regulators oversee crypto-asset exchanges through state money
transfer laws, and the Treasury Department’s Financial Crimes Enforcement Network monitors
them for anti-money laundering purposes.
Crypto-assets have a growing presence in the financial services industry. Their increasing use in
capital markets raises policy questions regarding whether changes to existing laws and
regulations are warranted and, if so, when such changes should happen, what form they should
take, and which agencies should take the lead.
In general, during policy considerations, investor protection and market integrity concerns should
be balanced with the need to foster financial innovation. Some believe that certain crypto-asset
activities that may appear similar to traditional activities nonetheless require adjusted regulatory
approaches to account for particular operating models that may amplify risks differently.208
Others believe that many crypto firms are replicating features of the traditional financial system
and should be treated in the same manner as traditional institutions that perform similar
functions.209 Policymakers generally contending with major financial innovations have
historically focused on addressing risk concerns while ensuring that regulations are sufficiently
flexible to accommodate evolving technology.210

206 Fidelity Digital Assets, Institutional Investor Digital Assets Study: Key Findings, October, 2022,
https://www.fidelitydigitalassets.com/sites/default/files/documents/
2022_Institutional_Investor_Digital_Assets_Study.pdf.
207 The CFTC has taken the position that many cryptocurrencies qualify as commodities under the Commodity
Exchange Act (P.L. 93-463). The agency has pursued several enforcement actions involving cryptocurrencies using its
authority over fraud and manipulation in interstate commodity spot markets. CFTC, Customer Advisory: Understand
the Risks of Virtual Currency Trading, https://www.cftc.gov/sites/default/files/idc/groups/public/@customerprotection/
documents/file/customeradvisory_urvct121517.pdf. For more information, see CRS Legal Sidebar LSB10227, CFTC
and Virtual Currencies: New Court Rulings and Implications for Congress, by Nicole Vanatko.
208 For example, Coinbase, Digital Asset Policy Proposal, October 24, 2021, https://assets.ctfassets.net/c5bd0wqjc7v0/
7FhSemtQvq4P4yS7sJCKMj/a98939d651d7ee24a56a897e2d37ef30/coinbase-digital-asset-policy-proposal.pdf.
209 For example, Huw Jones, “Global Regulators Back ‘Same Risk, Same Regulation’ for Stablecoins,” Reuters, July
13, 2022, https://www.reuters.com/technology/global-regulators-back-same-risk-same-regulation-stablecoins-2022-07-
13.
210 One example is the evolution of the equity market structure, which went from pen and paper to high-frequency
trading, and the regulatory changes along the way. For more details, see SEC Historical Society, Transformation and
Regulation: Equities Market Structure, 1934 to 2018, https://www.sechistorical.org/museum/galleries/msr.
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SEC and CFTC Jurisdiction
The SEC is the primary regulator overseeing securities offers, sales, and investment activities,
including those involving crypto-assets. When a crypto-asset meets the criteria defining a
security,211 it is subject to securities regulation, per existing SEC jurisdiction. SEC Chair Gary
Gensler has repeatedly stated that the vast majority of crypto tokens are securities, while some
crypto-assets are not.212 Other stakeholders, including the crypto industry, disagree with that
assertion.213
Crypto-assets may also be commodities under the Commodity Exchange Act (P.L. 74-675). In
such cases, they are subject to the CFTC’s jurisdiction, which generally extends to commodities
and derivatives.214 For example, under this framework, most initial coin offerings are considered
securities,215 but Bitcoin is considered a commodity, not a security.216 Securities regulations could
also apply if crypto market intermediaries (e.g., investment advisers, trading platforms, and
custodians) are directly engaged in the security-based crypto-asset transactions.217
For crypto-assets that are securities, the SEC has both (1) enforcement authority that allows it to
bring civil enforcement actions, such as anti-fraud and anti-manipulation actions, for securities
laws violations after the fact, and (2) regulatory authority, including over digital asset securities,
which could include registration requirements, oversight, and principles-based regulation.218 Also,
the Commodity Exchange Act provides the CFTC with enforcement and regulatory authority over
digital asset derivatives.219 However, the CFTC has enforcement authority, not regulatory
authority, over the spot market of digital asset commodities.220

211 For more details, see SEC, Framework for “Investment Contract” Analysis of Digital Assets, April 3, 2019,
https://www.sec.gov/files/dlt-framework.pdf.
212 SEC Chair Gary Gensler, “Kennedy and Crypto,” September 8, 2022, https://www.sec.gov/news/speech/gensler-
sec-speaks-090822.
213 Coinbase, Petition for Rulemaking—Digital Asset Securities Regulation, July 21, 2022, https://assets.ctfassets.net/
c5bd0wqjc7v0/5NRidtW8lvwVEfSHpndWQm/78f95afa4f0ebaaefb303e1a4f172d03/
Coinbase_petition_for_SEC_rulemaking.pdf.
214 For more on derivatives, see CRS In Focus IF10117, Introduction to Financial Services: Derivatives, by Rena S.
Miller.
215 For more on initial coin offerings, see PDF page 9 of CRS Report R46208, Digital Assets and SEC Regulation, by
Eva Su.
216 SEC Division of Corporate Finance Director William Hinman, “Digital Asset Transactions: When Howey Met Gary
(Plastic),” speech delivered at Yahoo Finance All Markets Summit: Crypto, San Francisco, CA, June 14, 2018,
https://www.sec.gov/news/speech/speech-hinman-061418.
217 For example, a digital asset securities trading platform could be subject to securities regulation. Bitcoin is not a
security, but the Bitcoin exchange-traded fund share is a security and would be subject to securities regulation. In
addition, as former SEC Chair Jay Clayton stated, “regulated financial entities that allow for payment in
cryptocurrencies, allow customers to purchase cryptocurrencies on margin or otherwise use cryptocurrencies to
facilitate securities transactions should exercise caution, including ensuring that their cryptocurrency activities are not
undermining their anti-money laundering and know-your-customer obligations.” Testimony of SEC Chairman Jay
Clayton in U.S. Congress, Senate Committee on Banking, Housing, and Urban Affairs, February 6, 2018,
https://www.sec.gov/news/testimony/testimony-virtual-currencies-oversight-role-us-securities-and-exchange-
commission.
218 Julia Black, The Rise, Fall and Fate of Principles Based Regulation, November 21, 2010, https://papers.ssrn.com/
sol3/papers.cfm?abstract_id=1712862.
219 CFTC Commissioner Dawn Stump, “Digital Assets: Clarifying CFTC Regulatory Authority and the Fallacy of the
Question, ‘Is it a Commodity or a Security?,’” https://www.cftc.gov/media/6306/
DigitalAssetsAuthorityInfographic_CommStump082321/download.
220 A spot market is where commodities or securities are traded for immediate delivery. The spot market is in contrast
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While the CFTC does not regulate digital asset securities, if a digital asset instrument is a
security-based derivative, the SEC and CFTC may both have jurisdiction.221
Perceived Crypto-Asset Regulatory Gap
Because crypto-asset commodities spot market activities receive CFTC oversight that generally
pertains to enforcement (and not regulatory) authority, activities in these non-security crypto-asset
markets are not subject to the same safeguards that apply in securities markets. Examples of such
safeguards include certain rules and regulations that encourage market transparency, conflict-
of-interest mitigation, investor protection, and orderly market operations.
The Financial Stability Oversight Council (FSOC)—a systemic risk oversight body—has
published recommendations related to this “regulatory gap,” encouraging Congress to pass
legislation that provides regulatory authority for federal financial regulators over spot markets for
crypto-assets that are not securities.222 FSOC states that this new rulemaking authority “should
not interfere with or weaken market regulators’ current jurisdictional remits.”223
Some Members of Congress have also proposed legislation to address the perceived crypto-asset
regulation gap through the redesign of SEC and CFTC jurisdiction.224
Financial regulators have traditionally followed the “same activity, same risk, same regulation”
principle to mitigate the potential risks of regulatory arbitrage.225 When designing a new
regulatory landscape, policymakers face challenging questions such as how (or if) they should
level the playing field between different types of crypto-assets (e.g., between digital asset
securities and commodities) as well as between crypto-assets and traditional assets (e.g., between
crypto-assets and stocks and bonds).
For Further Information
For questions on digital asset securities regulation, contact Eva Su, Analyst in Financial
Economics.
For questions on financial technology, contact Paul Tierno, Analyst in Financial Economics.
For questions on securities and banking laws and how courts have interpreted such issues, contact
Jay Sykes, Legislative Attorney.
Additional reading on digital asset securities is available in:
CRS Report R46208, Digital Assets and SEC Regulation, by Eva Su
CRS Testimony TE10066, America on ‘FIRE’: Will the Crypto Frenzy Lead to Financial
Independence and Early Retirement or Financial Ruin?, by Eva Su

to the futures derivatives market, where delivery is at a later time.
221 Stump, Digital Assets.
222 FSOC, Report on Digital Asset Financial Stability Risks and Regulation.
223 FSOC, Report on Digital Asset Financial Stability Risks and Regulation.
224 For example, the Lummis-Gillibrand Responsible Financial Innovation Act (S. 4356) and the Digital Commodity
Exchange Act of 2022 (H.R. 7614). See CRS Insight IN11971, How the Lummis-Gillibrand Responsible Financial
Innovation Act (S. 4356) Would Alter the Crypto Regulatory Landscape, by Andrew P. Scott et al.
225 Financial Stability Board, “FSB Proposes Framework for the International Regulation of Crypto-Asset Activities,”
October 11, 2022, https://www.fsb.org/2022/10/fsb-proposes-framework-for-the-international-regulation-of-crypto-
asset-activities.
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CRS Insight IN12052, SEC Jurisdiction and Perceived Crypto-Asset Regulatory Gap: An FTX
Case Study, by Eva Su
CRS Report R47425, Cryptocurrency: Selected Policy Issues, by Paul Tierno
CRS Legal Sidebar LSB10832, Crypto Assets and Property of the Bankruptcy Estate: An
Analysis, by Michael D. Contino
Policy Issue: Stablecoins
Stablecoins are digital assets generally designed to maintain a stable value by linking the value to
a national currency or other reference assets.226 The term stablecoin does not affirm that a
particular coin actually achieves a stable value. Some consider terms such as private asset-linked
tokens as better descriptors.227 Many stablecoins have different operational structures and reserve
compositions. Reserve assets backing stablecoins include fiat currencies, traditional financial
assets, or other digital assets.
Many stablecoins at the current stage of development are primarily used for payment functions to
facilitate digital asset trading and lending. Although stablecoins represent a relatively small
fraction (5%) of the digital asset industry’s total value, they facilitated more than 75% of trading
on all digital asset trading platforms as of October 31, 2021.228 Stablecoin-related policy concerns
include issues related to market integrity, investor protection, financial stability, monetary policy,
payments, and illicit activity prevention.
Stablecoins are arguably similar to other financial instruments. In addition, stablecoins’
management and structuring of the reserve funds resemble existing practices at MMFs and ETFs.
Stablecoins resemble certain investment funds. Stablecoins often have reserve asset portfolios
that hold assets backing the coins’ values. Many industry observers and some regulators believe
that the general mechanisms involved in creating, distributing, and redeeming stablecoins—and
the means by which stablecoins aim to maintain their pegs with a reference asset—resemble
similar mechanisms employed by MMFs and ETFs, which are regulated by the SEC.229 Some
commentators have thus argued that stablecoins should be regulated as investment companies by
the SEC.230
Stablecoins also have money and payment characteristics. Some observers view stablecoins as a
new form of private money that closely resembles the “wildcat” banknotes of the mid-19th
century.231 During the “wildcat” or “free banking” era (1837-1863), state-chartered banks issued

226 President’s Working Group on Financial Markets, Federal Deposit Insurance Corporation, and Office of the
Comptroller of the Currency, Report on Stablecoins, November 1, 2021, https://home.treasury.gov/system/files/136/
StableCoinReport_Nov1_508.pdf.
227 Financial Stability Board, “Regulation, Supervision and Oversight of ‘Global Stablecoin’ Arrangements,” October
13, 2020, https://www.fsb.org/wp-content/uploads/P131020-3.pdf#page=13.
228 SEC Chair Gary Gensler, “Statement on President’s Working Group Report on Stablecoins,” November 1, 2021,
https://www.sec.gov/news/statement/gensler-statement-presidents-working-group-report-stablecoins-110121.
229 Board of the International Organization of Securities Commissions, Global Stablecoin Initiatives, March 2020,
https://www.iosco.org/library/pubdocs/pdf/IOSCOPD650.pdf.
230 Helene Braun, “Asset Manager Van Eck Says Stablecoins Should Be Treated as Investment Funds, Not Banks,”
CoinDesk, February 15, 2021, https://www.coindesk.com/markets/2022/02/11/asset-manager-van-eck-says-stablecoins-
should-be-treated-as-investment-funds-not-banks.
231 Gary Gorton and Jeffery Zhang, “Taming Wildcat Stablecoins,” September 30, 2021, https://papers.ssrn.com/sol3/
papers.cfm?abstract_id=3888752.
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their own currencies and sometimes refused to redeem their notes. This era ended with the
National Bank Act of 1863,232 which established the Office of the Comptroller of the Currency
and charged it with chartering and regulating national banks, which in turn issued a uniform
national currency.
When discussing stablecoins, some regulators reference the wildcat era, questioning the “long-
term viability for five or six thousand private forms of money.”233 Some academic researchers
argue that “money” must satisfy the “no-question-asked” principle, meaning an instrument is
accepted in a transaction without due diligence regarding its value.234 Stablecoins arguably do not
satisfy this principle in their current form.
Some observers have voiced financial stability concerns regarding stablecoins. Some
commentators have argued that stablecoins are vulnerable to runs if investors lose confidence in
the assets backing them. Such runs might create contagion risks for other crypto-assets and even
the traditional financial system. Some stablecoins have already experienced runs, though their
impact was largely confined to the crypto ecosystem.235
Some observers have also argued that stablecoins are not adequately regulated.236 In the
traditional financial system, various regulations and protections—such as deposit insurance,
capital and liquidity requirements, and liquidity facilities—help minimize run risk. Stablecoin
investors do not have such protections.
Policy Proposals
Some Members of Congress and financial regulators have perceived gaps in the existing
stablecoin regulatory frameworks and proposed policy alternatives.237 Among other options,
commentators have proposed regulating stablecoin issuers as (1) MMFs; (2) MMFs subject to
increased prudential measures, such as additional capital requirements and liquidity buffers; (3)
special purpose banks; (4) insured depository institutions; and (5) FSOC-designated systemically
important entities. Alternatively, stablecoin issuers could be regulated under a separate new
framework administered by a specialist digital asset regulator.
Policy debates during the second half of 2022 gave more recognition to the different types of
stablecoins (e.g., money-like stablecoins and others). Some stablecoin proposals echoed aspects
of international practices or proposals in the European Union and Japan in separating the money-

232 12 U.S.C. §38.
233 SEC Chair Gary Gensler statement quoted by media. See Helaine Olen, “Think You’re the One to Beat the Crypto
Crash? Think Again,” Washington Post, May 23, 2022, https://www.washingtonpost.com/opinions/2022/05/23/
cryptocurrency-crash-vulnerable-investors.
234 Gary Gorton, The History and Economics of Safe Assets, National Bureau of Economic Research Working Paper no.
22210, April 2016, https://www.nber.org/system/files/working_papers/w22210/w22210.pdf.
235 For example, the Iron Titanium token faced a run-like scenario in June 2021, and TerraUSD faced a run-like
scenario in May 2022.
236 Paul Kiernan, “Yellen Renews Call for Stablecoin Regulation After TerraUSD Stumble,” Wall Street Journal, May
10, 2022, https://www.wsj.com/articles/yellen-renews-call-for-stablecoin-regulation-after-terrausd-stumble-
11652208165.
237 For example, the Stablecoin Transparency Act (H.R. 7328 and S. 3970, 117th Congress); the Digital Asset Market
Structure and Investor Protection Act (H.R. 4741, 117th Congress); the Lummis-Gillibrand Responsible Financial
Innovation Act (S. 4356, 117th Congress); the Stablecoin TRUST Act of 2022 discussion draft; the Stablecoin
Classification and Regulation Act of 2020 (H.R. 8827, 116th Congress); and the Managed Stablecoins are Securities
Act of 2019 (H.R. 5197, 116th Congress). See also the President’s Working Group on Financial Markets, the Federal
Deposit Insurance Corporation, and the Office of the Comptroller of the Currency, Report on Stablecoins.
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like payment stablecoins from other forms of stablecoins and subjecting the money-type
stablecoins to certain banking regulations.238
For Further Information
For questions on stablecoin regulatory design, contact Eva Su, Analyst in Financial Economics.
For questions on crypto-asset payments, money tramsmitters, and bank charters, contact Andrew
Scott, Analyst in Financial Economics.
For questions on securities and banking laws and how courts have interpreted such issues, contact
Jay Sykes, Legislative Attorney.
For questions on financial technology, contact Paul Tierno, Anslyst in Financial Economics.
Additional reading on stablecoins is available in:
CRS In Focus IF11968, Stablecoins: Background and Policy Issues, by Eva Su
CRS Insight IN11713, How Stable Are Stablecoins?, by Eva Su
CRS Insight IN11928, Algorithmic Stablecoins and the TerraUSD Crash, by Paul Tierno, Andrew
P. Scott, and Eva Su
CRS Legal Sidebar LSB10753, Stablecoins: Legal Issues and Regulatory Options (Part 1), by
Jay B. Sykes
CRS Legal Sidebar LSB10754, Stablecoins: Legal Issues and Regulatory Options (Part 2), by
Jay B. Sykes
CRS Report R46486, Telegraphs, Steamships, and Virtual Currency: An Analysis of Money
Transmitter Regulation, by Andrew P. Scott
Capital Market Volatility and Market-Driven Events
History shows that capital markets generally provide reliable sources of financing for businesses.
Businesses can obtain such funding by, for example, issuing stocks and bonds. The funding can
then be used for equipment purchases, research and development, employee salaries, or other
functions that could facilitate operations and growth. Institutions and households can partake in
these growth opportunities by investing in stocks, bonds, and funds with the hope of future
returns.
In crisis conditions, however, capital market functions can come to a halt. Certain markets may
no longer generate transactions, or the transactions may become abnormally expensive.
Previously ubiquitous funding channels can become unreliable, creating funding shortages for
businesses and financial losses for investors. Furthermore, businesses and investors might start to

238 For European Union practices, see European Commission, “Proposal for a Regulation on Markets in Crypto-
Assets,” September 24, 2020, https://eurlex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52020PC0593. For related
legislation in Japan, see Japanese language text of the law at https://www.sangiin.go.jp/japanese/joho1/kousei/gian/208/
pdf/s0802080472080.pdf. Analysis using English media sources by Natsumi Iwata and Keita Sekiguchi, “Japan Adopts
Law to Regulate Stablecoins for Investor Protection,” Nikkei Asia, June 3, 2022, https://asia.nikkei.com/Spotlight/
Cryptocurrencies/Japan-adopts-law-toregulate-stablecoins-for-investor-protection; and Taiga Uranaka and Yuki
Hagiwara, “Japan Passes Stablecoin Bill That Enshrines Investor Protection,” Bloomberg, June 2, 2022,
https://www.bloomberg.com/news/articles/2022-06-03/japan-passesstablecoin-bill-that-enshrines-investor-protection.
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hoard cash and sell risky assets. These activities may lead to asset devaluation, fire sales, and
bankruptcies that may have a negative ripple effect on the broader economy.
The uncertainties surrounding crisis conditions can increase volatility, meaning markets
experience greater price fluctuation and dispersion.239 Volatility is a common indicator of risk—
excessive volatility often coincides with market turmoil or high levels of uncertainty.240
Policy Issue: Tools to Ease Extreme Market Conditions
Periods of abnormally high capital market volatility have occurred throughout financial history
(Figure 7). The uncertainties that have triggered such events have varied widely—from
pandemics to financial system breakdowns to geopolitical risks. Policy responses to such
episodes have depended on the size of the potential harm and how widely risks have spread. In
some situations, risks built up in expected patterns. In other situations, heightened stress revealed
unexpected areas of vulnerability, and unprecedented policy solutions were needed to address
them. For example, during the COVID-19-induced selloff, market dislocations were broadly felt,
and the policy response included a mix of novel and preexisting tools.241
Figure 7. Modeled Market Volatility (VIX Index) over a Century

Source: BNP Paribas, 100 Years of Crashes: COVID-19 Crisis Playbook, April 17, 2020.
Note: The VIX index is a market index that measures the market’s expectation of 30-day forward-looking
volatility using inputs from S&P 500 options.
Market volatility may warrant policy attention when it reveals areas of structural vulnerability.
Congress and the SEC have responded to such issues in several ways.
Potential SEC Responses
The SEC has responsibilities regarding capital market operations, systemic risk, and financial
stability.242 For example, during the pandemic-induced market selloff in early 2020, its

239 Volatility is a statistical measure of the degree of variation in a financial instrument’s trading price observed over a
period of time. It can be historical or implied, and volatility itself can also be a tradable market instrument. A market
index, called the VIX index, is often used to measure the market’s expectation of 30-day forward-looking volatility
using inputs from S&P 500 options. This report does not cover the technical details of volatility.
240 For more on market volatility, see CRS Report R46424, Capital Markets Volatility and COVID-19: Background and
Policy Responses, by Eva Su.
241 See CRS Report R46424, Capital Markets Volatility and COVID-19: Background and Policy Responses, by Eva Su.
242 The SEC is a member of FSOC, which has a statutory mandate for identifying risks and responding to emerging
threats to financial stability. FSOC, “About FSOC,” https://home.treasury.gov/policy-issues/financial-markets-
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responsibilities included (1) monitoring market price movements and the availability and flows of
capital, and related actions, including regulatory relief; (2) ensuring the continuous, orderly, and
fair functioning of the securities markets; and (3) facilitating timely and accurate disclosures of
material information to ensure market transparency.243
The SEC’s existing tools to help manage market volatility include circuit breakers and limit-up-
limit-down (LULD) mechanisms. Circuit breakers are market-wide temporary halts that occur at
three single-day S&P 500 index decline thresholds—7% (level 1), 13% (level 2), and 20% (level
3).244 The level 1 and 2 circuit breakers generally enforce 15-minute pauses, and the level 3
circuit breaker halts the market for the rest of the day.245 LULDs are single-stock halts enforced
by “price bands” of 5%, 10%, 20%, or the lesser of $0.15 or 75%, depending on the stock price
over the immediately preceding five-minute trading period.246 The LULD mechanism forces a
stock to take a five-minute trading pause if its price increases or decreases outside of these price
bands.
Both market-wide and single-stock halts were designed to allow investors to pause and digest
information during volatile and fast-paced market movements. While some believe the halts serve
the purpose of calming market volatility, others argue that the halts can be disruptive, especially
when circuit breakers are tripped immediately following market openings.247
In addition to these existing mechanisms, other proposals to address market volatility include
banning short sales and revisiting the SEC’s uptick rule that applies short-selling restrictions.248
Proponents of such measures argue that short sales exacerbate market declines and so should be
restricted. Others have rejected that argument, pointing to evidence that past impositions of short-
sale restrictions have coincided with poor stock market performance.249
Some observers have also argued that shutting down stock markets or opening them for a shorter
trading day may calm extreme market volatility. Views on this approach are mixed, with some
observers believing total shutdowns are problematic.250

financial-institutions-and-fiscal-service/fsoc/about-fsoc.
243 Former SEC Chairman Jay Clayton, “Remarks to the Financial Stability Oversight Council,” May 14, 2020,
https://www.sec.gov/news/speech/clayton-remarks-financial-stability-oversight-council-051420. For specific examples,
see SEC, “SEC Coronavirus (COVID-19) Response,” https://www.sec.gov/sec-coronavirus-covid-19-response.
244 SEC, “Investor Bulletin: Measures to Address Market Volatility,” July 1, 2012, https://www.sec.gov/oiea/investor-
alerts-bulletins/investor-alerts-circuitbreakersbulletinhtm.html.
245 A market decline that triggers a level 1 or level 2 circuit breaker before 3:25 p.m. will halt market-wide trading for
15 minutes, whereas a similar market decline at or after 3:25 p.m. will not halt market-wide trading.
246 SEC, “Investor Bulletin: Measures to Address Market Volatility.”
247 Alexander Osipovich and Dawn Lim, “Wall Street Explores Changes to Circuit Breakers After Coronavirus Crash,”
Wall Street Journal, April 15, 2020, https://www.wsj.com/articles/wall-street-explores-changes-to-circuit-breakers-
after-coronavirus-crash-11586952558.
248 For more on the uptick rule, see SEC, “SEC Approves Short Selling Restrictions,” press release, February 24, 2015,
https://www.sec.gov/news/press/2010/2010-26.htm.
249 Robert Battalio, Hamid Mehran, and Paul Schultz, “Market Declines: What Is Accomplished by Banning Short-
Selling?,” Federal Reserve Bank of New York, 2012, https://www.newyorkfed.org/medialibrary/media/research/
current_issues/ci18-5.pdf.
250 Reuters, “U.S. Finance Industry Says Markets Must Stay Open During Pandemic,” March 20, 2020,
https://www.reuters.com/article/us-health-coronavirus-usa-markets/u-s-finance-industry-says-markets-must-stay-open-
during-epidemic-idUSKBN21720O.
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Potential Legislative Responses
To address extreme market volatility, Congress could pass laws to provide fiscal stimulus and
liquidity support during financial crises. For example, provisions in Division A, Title IV, of the
CARES Act (P.L. 116-136), enacted during the COVID-19 pandemic, affected capital market
conditions.251 Some of the provisions allowed the Department of the Treasury to provide loans,
loan guarantees, and other backstops for businesses and Federal Reserve facilities and provide
financial assistance to certain segments of the economy.252 However, such measures sometimes
entail a potential tradeoff. When the government backstops markets, it may contribute to “moral
hazard”—a phenomenon whereby market participants take on excessive risk in the belief that
another party, in this case the government, will bear some of the potential costs.253
For Further Information
For questions about capital markets volatility, contact Eva Su, Analyst in Financial Economics.
Additional reading on market volatility is available in:
CRS Report R46424, Capital Markets Volatility and COVID-19: Background and Policy
Responses, by Eva Su
CRS Insight IN11494, Why Have Stock Market and Real Economy Diverged During the COVID-
19 Pandemic?, by Eva Su
CRS Insight IN11309, COVID-19 and Stock Market Stress, by Eva Su
CRS Insight IN11275, COVID-19 and Corporate Debt Market Stress, by Eva Su
CRS Insight IN11591, GameStop-Related Market Volatility: Policy Issues, by Eva Su
CRS In Focus IF11825, Family Office Regulation in Light of the Archegos Fallout, by Gary
Shorter and Eva Su
CRS In Focus IF11673, “Zombie” Companies: Background and Policy Issues, by Eva Su
SEC Agency Operations
Congress passed the Securities Exchange Act of 1934 (P.L. 73-291) to create the SEC in the wake
of the stock market crash in 1929 to help restore confidence in capital markets. The SEC is an
independent federal regulatory agency responsible for administering federal securities laws. It is
led by five presidentially appointed commissioners, including a chair, subject to Senate
confirmation. Commissioners have staggered five-year terms, and no more than three
commissioners may belong to the same political party.
The SEC oversees federal securities laws broadly aimed at (1) protecting investors; (2)
maintaining fair, orderly, and efficient markets; and (3) facilitating capital formation.254 These
laws provide rules for honest dealing among securities market participants, including antifraud

251 For more on the CARES Act (P.L. 116-136), see CRS Report R46301, Title IV Provisions of the CARES Act (P.L.
116-136), coordinated by Andrew P. Scott.
252 See CRS Report R46301, Title IV Provisions of the CARES Act (P.L. 116-136), coordinated by Andrew P. Scott.
253 One example of moral hazard involves financial institutions that are considered “too-big-to-fail” (TBTF). Because
institutions that are TBTF expect that they will be bailed out if they experience financial difficulty, they may take
excessive risks. For more on TBTF, see CRS Report R42150, Systemically Important or “Too Big to Fail” Financial
Institutions, by Marc Labonte.
254 SEC, “Our Goals,” https://www.sec.gov/our-goals.
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provisions, and require public companies to disclose information deemed necessary for informed
investor decisionmaking.
The SEC’s budget is set through the congressional appropriations process. Sale fees on stock and
other securities transactions that the SEC collects from securities exchanges offset the
appropriations. Annual collections, which historically exceeded the SEC’s annual appropriations,
go directly to the U.S. Treasury’s General Fund. Over the past few years, the SEC’s enacted
annual budget has been close to $2 billion.
The SEC has close to 5,000 full-time equivalent employees across six divisions, one independent
office (inspector general), and 11 regional field offices. Figure 8 illustrates the SEC’s main
divisions.
 The Corporation Finance Division is responsible for the review of securities
issuer filings and disclosure.255
 The Enforcement Division takes actions to deter misconduct and punish
securities law violations.256
 The Examinations Division conducts the SEC’s National Exam Program that
involves onsite examinations of market participants such as investment
management companies and advisers, broker-dealers, clearing agencies, and self-
regulatory organizations (e.g., FINRA, MSRB, and national securities
exchanges).257
 The Investment Management Division regulates investment management
companies and investment advisers pursuant to the Investment Company Act of
1940 and Investment Advisers Act of 1940 (P.L. 76-768).258
 The Trading and Markets Division oversees capital market infrastructure and
its participants to help maintain fair, orderly, and efficient markets.259
 The Economic and Risk Analysis Division provides cross-divisional support for
the agency on research, economic analysis, and data analytics.260

255 SEC, “Division of Corporation Finance,” https://www.sec.gov/page/corpfin-section-landing.
256 SEC, “Division of Enforcement,” https://www.sec.gov/page/enforcement-section-landing.
257 SEC, “Division of Examination,” https://www.sec.gov/exams.
258 SEC, “Division of Investment Management,” https://www.sec.gov/investment-management.
259 SEC, “Trading and Markets,” https://www.sec.gov/divisions/trading-markets.
260 SEC, “Economic and Risk Analysis,” https://www.sec.gov/dera.
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Capital Markets: Overview and Selected Policy Issues

Figure 8. SEC Organizational Chart

Source: SEC, https://www.sec.gov/about/secorg.pdf.
Note: *Indicates an independent office.
Policy Issue: SEC Rulemaking Agenda Under Chair Gensler
During SEC Chair Gary Gensler’s tenure, which started in 2021, the SEC’s rulemaking agenda
has generated policy debate. The SEC’s spring 2022 agency rule list consists of 53 items for the
short-term agenda and eight items for the long-term agenda.261 The agency had proposed 35 new
rules in 2022, substantially more than in previous years.262 In addition, relative to other recent
SEC chairs during the Trump and the Obama Administrations, Gensler’s pace of rulemaking
appears substantially higher (Figure 9).263 Policy debates include (1) whether the recent pace of
rulemaking allowed enough time for participants to consider and comment on new rules, (2)
whether some of the SEC’s proposed rules exceed the agency’s legal authority, and (3) whether
important issues perceived to warrant new rulemaking have been addressed in a timely manner.
This section discusses each of these topics in more detail.

261 For the short-term agenda, see SEC, “Agency Rule List—Spring 2022,” https://www.reginfo.gov/public/do/
eAgendaMain?operation=OPERATION_GET_AGENCY_RULE_LIST&currentPub=true&agencyCode=&
showStage=active&agencyCd=3235&csrf_token=
C3F61296B896EEB30E0DB0BF6800703CB28489E9081F8F5D325D6B4BD47976AA2C146534BEF01AA9E7A502
9B8C150A52F066https://www.reginfo.gov/public/do/eAgendaMain?operation=
OPERATION_GET_AGENCY_RULE_LIST&currentPub=true&agencyCode=&showStage=active&agencyCd=
3235&csrf_token=
C3F61296B896EEB30E0DB0BF6800703CB28489E9081F8F5D325D6B4BD47976AA2C146534BEF01AA9E7A502
9B8C150A52F066. For long-term agenda, see SEC, “Agency Rule List—Spring 2022,” https://www.reginfo.gov/
public/do/eAgendaMain?operation=OPERATION_GET_AGENCY_RULE_LIST&currentPubId=202204&
showStage=longterm&agencyCd=3235&csrf_token=
7B0ECEF5C9C8C5E68CD0C9B5E478073A4E471590DB23590B848779794A7811ABD0FAEE22374B05824061237
E3E5FE01DEEC2.
262 SEC, “SEC Proposed Rules,” https://www.sec.gov/rules/proposed.shtml.
263 SEC, “SEC Historical Summary of Chairmen and Commissioners,” https://www.sec.gov/about/
sechistoricalsummary.
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Figure 9. Rules Proposed or Finalized by SEC Chairs

Source: The Economist, “Can Gary Gensler Solve Every Problem in American Finance?,” October 26, 2022,
https://www.economist.com/finance-and-economics/2022/10/26/can-gary-gensler-solve-every-problem-in-
american-finance.
Notes: For more details, see SEC, “SEC Historical Summary of Chairmen and Commissioners,”
https://www.sec.gov/about/sechistoricalsummary; SEC, “SEC Proposed Rules,” https://www.sec.gov/rules/
proposed.shtml; and SEC, “SEC Final Rules,” https://www.sec.gov/rules/final.htm.
Some observers requested the SEC to extend the comment period for its rulemaking process.264
They argued that the relatively short comment period may not leave sufficient time for industry
stakeholders to research, analyze, and provide quality comments on substantive changes. Other
observers argue that the short and overlapping comment periods may place cumulative challenges
on the industry’s capacity to respond.265 The discussions have gained more momentum since
April 2022, when a group of 47 House Members (117th Congress, 28 Democrats and 19
Republicans) and 25 industry groups sent letters to the SEC to express concern over the length of
certain comment periods that “may hamper the ability for the public to provide effective and
meaningful input.”266
In addition, some observers question the SEC’s authority for certain rulemakings, while others
note the absence of certain important topics from the agenda. Regarding the former issue,
attorneys general from 24 states sent a letter to the SEC regarding “the major questions doctrine,”
in which they claim that, in some cases, the agency “must point to clear congressional
authorization for the power it claims.”267 Regarding the latter, while the scope of the current SEC

264 Rep. Patrick McHenry and Sen. Pat Toomey, letter to the SEC, January 10, 2022, https://republicans-
financialservices.house.gov/uploadedfiles/2022-01-10_pmc_toomey_letter-gensler_sec_comment_period.pdf.
265 Al Barbarino, “SEC Under Fire Over Shorter Rule Proposal Comment Periods,” Law360, March 9, 2022,
https://www.law360.com/banking/articles/1471291/sec-under-fire-over-shorter-rule-proposal-comment-periods; and
SIFMA, “Substantive and Procedural Concerns with the SEC’s Regulatory Agenda,” September 20, 2022,
https://www.sifma.org/resources/news/substantive-and-procedural-concerns-with-the-secs-regulatory-agenda.
266 Member letter to the SEC, “Private Fund Advisers; Documentation of Registered Investment Compliance Reviews
(‘Private Fund NPRM’),” April 13, 2022, https://subscriber.politicopro.com/f/?id=00000180-29a6-d749-ab92-
b9bf20d30000. Industry group letter to the SEC, “Importance of Appropriate Length of Comment Periods,” April 5,
2022, https://www.sifma.org/wp-content/uploads/2022/02/SEC_Joint-Trades_Comment-Period-Letter_4-5-2022.pdf.
267 State attorneys general letter to the SEC, Supplemental Comments on Proposed Rule Amendments titled “The
Enhancement and Standardization of Climate-Related Disclosures for Investors” by the Attorneys General of the States
of West Virginia, Arizona, Alabama, Alaska, Arkansas, Florida, Georgia, Idaho, Indiana, Kansas, Kentucky, Louisiana,
Mississippi, Missouri, Montana, Nebraska, North Dakota, Ohio, Oklahoma, South Carolina, South Dakota, Utah,
Virginia, and Wyoming (SEC File No. S7-10-22), July 13, 2022, https://ago.wv.gov/Documents/Q0664665.pdf.
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rulemaking agenda is extensive, advocates for increased regulatory clarity in certain areas believe
that the SEC did not address some of the most obvious policy issues. For example, one of the
SEC commissioners argued that certain large and complex issues, such as digital asset regulation,
are absent from the agenda.268
The SEC’s Office of Inspector General raised concerns about how the rulemaking activities have
led to increased risks and resource shortages, stating in October 2022 that “some believed that the
more aggressive agenda—particularly as it relates to high-profile rules that significantly impact
external stakeholders—potentially (1) limits the time available for staff research and analysis, and
(2) increases litigation risk.”269
The SEC introduced its agenda items while citing a 1963 statement—“no regulation can be static
in a dynamic society.”270 Gensler stated that by updating its rules, the SEC will modernize them
for changing market environments and potentially create more market efficiency.271 Gensler
further argued that it is important to “move to the next steps in the rulemaking process to
determine whether the SEC should re-propose, modify, or adopt the proposed rules based upon
the feedback.”272 On another occasion, Gensler responded to concerns regarding agency
rulemaking processes, citing the number of rules finalized during multiple former SEC Chairs’
full tenures, believing his pace of rulemaking is “right in the zone.”273
For Further Information
For questions about SEC regulation and capital markets rulemaking, contact Eva Su, Analyst in
Financial Economics.
For questions about SEC agency operations, contact Gary Shorter, Specialist in Financial
Economics.
Additional reading on the SEC is available in:
CRS In Focus IF11714, Introduction to Financial Services: The Securities and Exchange
Commission (SEC), by Gary Shorter.
CRS In Focus IF11062, Introduction to Financial Services: Capital Markets, by Eva Su.

268 SEC Commissioner Mark Uyeda, “Remarks at the ‘SEC Speaks’ Conference 2022,” September 9, 2022,
https://www.sec.gov/news/speech/uyeda-speech-sec-speaks-090922.
269 SEC Office of Inspector General, “The Inspector General’s Statement on the SEC’s Management and Performance
Challenges,” October 13, 2022, https://www.sec.gov/files/inspector-generals-statement-sec-mgmt-and-perf-challenges-
october-2022.pdf.
270 SEC, “SEC Announces Spring 2022 Regulatory Agenda,” press release, June 22, 2022, https://www.sec.gov/news/
press-release/2022-112.
271 SEC, “SEC Announces Spring 2022 Regulatory Agenda.”
272 Quoted text is a summary by Soyoung Ho, “Gensler Defends 30, 45-Day Comment Period for SEC Rulemaking
Proposals,” Reuters, January 24, 2022, https://tax.thomsonreuters.com/news/gensler-defends-30-45-day-comment-
period-for-sec-rulemaking-proposals.
273 Soyoung Ho, “SEC Chair Gensler Defends Fast-Paced Rulemaking,” Thomson Reuters, October 5, 2022,
https://tax.thomsonreuters.com/news/sec-chair-gensler-defends-fast-paced-rulemaking.
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Author Information

Eva Su, Coordinator
Rena S. Miller
Analyst in Financial Economics
Specialist in Financial Economics

Gary Shorter
John J. Topoleski
Specialist in Financial Economics
Specialist in Income Security

Jay B. Sykes

Legislative Attorney

Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan
shared staff to congressional committees and Members of Congress. It operates solely at the behest of and
under the direction of Congress. Information in a CRS Report should not be relied upon for purposes other
than public understanding of information that has been provided by CRS to Members of Congress in
connection with CRS’s institutional role. CRS Reports, as a work of the United States Government, are not
subject to copyright protection in the United States. Any CRS Report may be reproduced and distributed in
its entirety without permission from CRS. However, as a CRS Report may include copyrighted images or
material from a third party, you may need to obtain the permission of the copyright holder if you wish to
copy or otherwise use copyrighted material.

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