Tech Concerns Motivate SEC Budget for Fiscal Year 2024
Recent technological advances, including cryptocurrency and artificial intelligence (“AI”), have made their stamp on the Securities and Exchange Commission (“SEC”) and its goals. In its recent budget request, the SEC signaled its intent to engage with and respond to the latest in technological trends.
SEC Chair’s Congressional Testimony
On March 29, 2023, SEC Chair Gary Gensler testified before Congress in support of President Biden’s budget request for fiscal year 2024.1 In his testimony, Chair Gensler stressed that fiscal year 2023 funding only brought the SEC’s staffing levels back to just above where they were seven years ago. Indeed, Gensler stated that while the Division of Enforcement received nearly two times the number of tips in 2022 as it did seven years ago in 2016, its workforce has shrunk 5 percent during that same period. Accordingly, Gensler made clear that increased staffing in all six of the SEC’s divisions was a key driver behind the new funding request.
Notably, Gensler stressed the necessity for “the SEC to grow along with the expansion and increased complexity in the capital markets” due to technological advances. Gensler noted rapid technological changes ranging from “electronic trading and the cloud to artificial intelligence and predictive data analytics,” to methods of investor communication. Further, Gensler called crypto markets “the Wild West,” and pointed to their lack of compliance and highly speculative nature.
The Programmatic Divisions’ Tech Related Budget Requests
The FY 2024 (“Budget Justification”) details the SEC’s plans in response to the growing technological needs acknowledged in Gensler’s testimony.2 After discussing the highly visible Divisions of Enforcement and Examination, the Budget Justification turns to the three programmatic divisions of the SEC — the Divisions of Corporation Finance, Trading and Markets, and Investment Management — and how they relate to the SEC’s broad goal to engage with new technologies, like artificial intelligence and machine learning, to support its mission.
The Division of Corporation Finance is responsible for ensuring that investors have “material information in order to make informed investment decisions” regarding public companies, as well as for recommending new and revised rules to the Commission.3 In the Budget Justification, the SEC signals its intention to embrace new AI technologies in support of those duties.4 Specifically, the SEC is requesting funding for data analyst positions “critical to the division’s effort to support the SEC’s broader undertaking to initialize and integrate machine-learning and artificial intelligence-supporting technology.”5 The SEC plans to put machine learning and AI to use in the rulemaking context in particular, to help make the data analysis process more efficient.6 To that end, the requested data analysts would employ predictive and information visualization models to help assess feedback from market participants during open comment periods.7
The Division of Trading and Markets regulates major securities market participants and establishes standards to make markets “fair, orderly, and efficient.” The Division of Trading and Markets has perhaps most keenly felt the continued and high-impact presence of the crypto market and digital trading.8 The Budget Justification reports that the division’s goal is to “analyze the need for potential rulemaking related to conflicts of interest and digital engagement practices,” and requests funding for an attorney adviser to support “cyber-related rulemaking.”9 The SEC also requests funding to support a financial analyst “to continue with in-depth analysis of crypto data.”10
Finally, the Budget Justification section on the Division of Investment Management acknowledges the evolving cybersecurity needs of individual investors. The Division of Investment Management is responsible for developing regulatory policy for investment companies, such as mutual funds and money market funds, and investment advisers, and in doing so protects the interests and of “Main Street investors.”11 As part of this function, the division plans to consider and recommend reforms related to cybersecurity requirements for investment advisers and funds.12 “In particular, [Investment Management] will focus on ensuring appropriate protections when reviewing new investment products, such as single stock ETFs and funds seeking investments in a limited set of crypto-related assets.”13
What This Means for You
Clearly, technological advancements in the marketplace have drawn the SEC’s attention. Cybersecurity concerns appear paramount, and the SEC appears poised to engage with digital trading issues. Importantly, the SEC’s embrace of AI and machine-learning technologies indicates its intention to grow with tech — not draw a line to keep it outside the Commission’s imprint. Indeed, the SEC has made clear that it intends to corral the “Wild West” crypto market and considers it to be squarely within the arena of SEC oversight.
If your business engages with any division of the SEC, leadership should expect a larger SEC in the coming years. In particular, companies engaged in the crypto industry should anticipate additional SEC oversight. Companies should consider the potential impact on your technological and digital practices in those spaces and seek counsel where you have questions or concerns.
1Gary Gensler, Chair, Sec. & Exch. Comm’n, Testimony at Hearing before the Subcommittee on Financial Services and General Government (March 29, 2023), https://www.sec.gov/news/testimony/gensler-testimony-subcommittee-financial-services-and-general-government-032923.
2Sec. & Exch. Comm’n, Fiscal Year 2024 Congressional Budget Justification (2023), https://www.sec.gov/files/fy-2024-congressional-budget-justification_final-3-10.pdf.
3Securities and Exchange Commission, Division of Corporation Finance, Sec. & Exch. Comm’n (last modified Jan. 31, 2017), https://www.sec.gov/page/corpfin-section-landing.
4Fiscal Year 2024 Congressional Budget Justification, at 23–25.
5Id. at 24.
8Id. at 26–30; Trading and Markets, Sec. & Exch. Comm’n (last modified Oct. 1, 2020), https://www.sec.gov/divisions/trading-markets.
9Fiscal Year 2024 Congressional Budget Justification, at 26, 27.
10Id. at 26.
11Division of Investment Management, Sec. & Exch. Comm’n (last modified Apr. 6, 2023), https://www.sec.gov/investment-management.
12Fiscal Year 2024 Congressional Budget Justification, at 31.
13Id. at 32.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.