A PhD Talks Climate; Tech Snafu; GOP Oversight Plans; Protesters Hit An Empty SEC
Capitol Account: Free Weekly Version
Congress has headed to the hills, but there was plenty going on in the financial regulation world this week. We talked with a scientist who is now working on climate finance issues — and backing SEC Chief Gary Gensler’s emission disclosure proposal. Then there was the surprise Friday announcement that the securities regulator had missed a bunch of comment letters that had been filed due to a computer error. Oops. We also interviewed a lot of Republicans — lawmakers, current and former aides, lobbyists — to see what the Financial Services Committee’s oversight agenda may look like if the GOP takes the House. We wrote about the still-murky FDIC leadership situation. Lastly, we asked: who protests at the SEC when few of its workers are back in the office?
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Friday Q and A: Ok, we admit it: at Capitol Account we spend a lot of time talking to lawyers. So we were excited this week to chat with somebody a bit out of our comfort zone – a PhD in physical chemistry. Alex Martin is also a financial regulation specialist (see, we’re not totally over our skis) with a focus on climate. He works at Americans for Financial Reform where he is spending a lot of time looking to beef up support for the SEC’s climate disclosure rule.
Martin was at the National Academy of Sciences and then did a stint with Democratic Senator Brian Schatz before going to AFR. Here is our (lightly edited and condensed) conversation:
Capitol Account: Tell us about your scientific background.
Alex Martin: I did research related to aerosols and how much light they absorb, and how much that affected radiative forcing, which causes climate change. That was my first foray. And then in grad school, I worked on some material science and optics, and the applications for this work was material characterization for things like solar cells. So I started my career as a nerd, doing fundamental science research.
CA: How did you get into financial regulation?
AM: I was on [Schatz’s] climate team, and we worked on a bunch of issues at the intersection of climate policy and finance. He served on Senate Banking and also was the chair of the climate crisis committee at the time. We were…trying to figure out how the federal government, and particularly the financial regulators, could start managing climate risk, as we were seeing it develop into quite a big problem within the financial system.
CA: It must have been pretty easy to pick up the finance side after learning chemistry.
AM: I wouldn't say it's easy. It's really interesting, in our cohort as we work on these issues, you really need some people with natural science experience in the room with economists, in the room with lawyers, to think about the correct policy path forward.
CA: Do you find that lawyers, economists and scientists all speak the same language?
AM: There's plenty of challenges with communication and getting everyone on the same page…That's been one of the critiques of the climate economic space over the years – that they didn't have enough natural scientist voices – to communicate the urgency of the threat. I think we're doing a better job though, of melding the groups together.
CA: You’ve been spending a lot of your time on the SEC’s climate disclosure plan, which as you know has been very controversial. What is your assessment?
AM: The proposal was very reasonable. It was very thoughtfully done. And, I think it was pretty squarely within their mandate. They focused pretty tightly on materiality and risk to institutions, and they focused on what the investors are saying they need to be able to value securities.
CA: Why then are so many companies, even those that now report their emissions, opposing the rule?
AM: There are a few issuers that are in highly exposed sectors like oil and gas, and the American Petroleum Institute, that have pushed back. They're worried that they're going to have to divulge a lot of risk that they haven't been managing, and they're going to have to get specific about how they're planning to stay solvent. And in truth, I think they don’t know how they're going to do it yet. And that's a risk to have to put into your filings. But there are a lot of institutions, including some very prominent financial institutions, which are mostly saying, `We think you should do this.’ You have Bank of America, Wells Fargo, Citi; you have massive asset managers, Vanguard and BlackRock. They ask for some accommodations, but they're mostly saying, ‘Let's get this information.’
CA: You’re outmatched, at least in budget, by the Chamber of Commerce and other big business lobbies. How do you deal with that?
AM: We lose a lot.
CA: Broadly, since you think about climate change every day, what is your outlook for the future? Should we have hope?
AM: It's never too late to improve the 2050 outlook. We are deeply too late to prevent harm. The next 10, the next 30 years are going to be a really difficult time of transformation in the economy. And we're going to have a ton of work to just make the transition, which is technically very difficult and requires a lot of capital. And then to figure out the distribution of consequences for people in different communities and countries – and of different wealth and of different races. I don't like to necessarily be a Debbie Downer. We have some good solutions. I'm thankful that we passed the Inflation Reduction Act, which gets us most of the way towards being on the path. But we needed to have taken this seriously 20 years ago….(Friday)
Technical Error: In a surprise Friday announcement, the SEC said a “technological error’’ has prompted it reopen the comment periods for many of the major controversial rules proposed under Gensler, potentially slowing the chair’s ambitious policy agenda — and giving opponents another whack at derailing it.
The regulations include several that are at the top of many businesses’ hit lists, including the climate disclosure rule, a proposal to force investors to quickly reveal their security-based swap positions and a sweeping plan to bolster oversight of the fees and business practices of hedge funds and private-equity firms.
In a statement, the SEC said the glitch caused it not to receive a number of letters submitted through the agency’s online system. Most of those comments were filed in August 2022 but the problem was found to have occurred as far back as June 2021, the agency added. The commission isn’t reopening the comment periods for long — just 14 more days (once the notice is published in the Federal Register). But it will take agency staff time to review any additional letters it receives… (Friday)
GOP Probes: We are starting to look at what the financial reg world may look like in an era of divided government – a scenario that many think will come to fruition after the November elections. We begin with the House (the most likely to flip) and zoom in on the Financial Services subcommittee on oversight on investigations, which is poised to take a major directional turn. Under Democrats, the panel often looked at diversity issues, including banks’ ties to slavery, housing inequality and even school shootings. As Republicans put together their own agenda, they see aggressive oversight as a must – and they’re already talking about potential probes into the biggest asset managers and the environmental, social and governance movement.
(It’s worth noting that if Republicans do take the House, it’s going to be extremely difficult for either party to pass legislation. So, GOP investigations and public hearings to call out regulators and “woke” executives could be the main game in town).
BlackRock’s Larry Fink is, not surprisingly, the CEO who is drawing the most attention from Republicans. Suffice it to say, they want him at a hearing. One of their main complaints, and something that will likely be pursued as part of a broader probe, is that the ESG funds that Fink and others have championed put the industry’s thumb on the scale in favor of clean energy – curtailing the ability of oil and coal companies to raise capital. Republicans say the strategy seems to benefit the asset management firms that are pushing the products, but they are dubious that actual investors are getting a good deal. Vanguard and State Street may also get unwanted attention but the lawmakers are far less familiar with their leaders.
Another probe that a senior lawmaker and several others close to the oversight panel said is already being discussed is a review of one of Wall Street’s big Washington opponents – the advocacy group Better Markets. This would, of course, please many financial companies who have been on the receiving end of sharply worded attacks from Dennis Kelleher, the non-profit’s co-founder and president.
Financial Services Republicans, the lawmaker said, have a particular interest in reviewing trades made by Kelleher’s co-founder Michael Masters. He runs his own investment firm, is the head of Better Markets board and has been a big financial backer of the group – a mixture of business and policy that this congressman said troubled him and a number of his colleagues. (As he put it: “Advocacy on one side, trading on the other side.”) In particular, the lawmaker said, they want to ask Masters about his investments in two meme stocks – GameStop and Bed Bath & Beyond – that were publicly disclosed in SEC filings (and have been written about in the conservative media). Kelleher testified at a financial services hearing in 2021 on the trading frenzy, but Republicans say he never disclosed that Masters was investing in some of the same stocks that were at issue. It’s not clear from the SEC documents whether Masters owned the shares when Kelleher appeared before Congress, or how much money he might have made, but Republicans plan to ask.
A Better Markets spokeswoman didn’t get back to us when asked to comment on the likely probe…. (Thursday)
Who Will Run the FDIC? Senate Banking Chairman Sherrod Brown told people at a recent fundraiser that he was blindsided by the White House’s move last month to nominate two Republicans to the FDIC, a comment that underscores the senator’s public remarks that he isn’t in a hurry to move forward on their confirmations.
But Brown, according to people familiar with the matter, also said at the private gathering that he was expecting a “diverse” FDIC chair. That would likely mean that Martin Gruenberg, the acting head of the agency who has been holding over on an expired term, will eventually be out. The question, however, is when – and that has proved to be debatable. While Republicans and the financial industry would love to see Gruenberg move on, progressive Democrats are pretty happy with the FDIC board’s 3-0 liberal-leaning majority (with two vacancies).
As for a replacement for Gruenberg, people familiar with the matter say the choice could come from the ranks of state banking regulators. One likely candidate, they add, is Adrienne Harris, the superintendent of the New York State Department of Financial Services. But, they note, there could be others as well.
A Senate Banking Committee spokesperson, when asked about Brown’s remarks, offered this statement:
“Chairman Brown has long fought for diverse and qualified nominees to lead our financial regulatory agencies, and he speaks often of that dedication. He will continue to work with the Biden administration to confirm financial regulators, including at the FDIC.”
A person familiar with the back-and-forth on FDIC nominees, also cautioned not to read the senator’s fundraiser comments as any sort of opposition to Gruenberg – or an endorsement of other candidates. While he works closely with the White House on nominees, Brown believes it is the administration’s job to make the call on who to select, the person adds.
Since Joe Biden won the White House, the FDIC has been at the center of some big political battles. Last year, the board’s three Democratic members (Gruenberg, CFPB Director Rohit Chopra and acting OCC chief Michael Hsu) banded together to wrest control from Donald Trump’s chairwoman, Jelena McWilliams. She ultimately resigned, but the move has left a bitter taste for many Republicans, especially the banking panel’s ranking member Pat Toomey.
Bank mergers have also been a flashpoint, with Gruenberg frustrating the industry by spearheading a review into whether federal policies on tie-ups should be more stringent.
The stay of play on the FDIC nominations is fluid and there are, of course, competing interests. Timing also could play an important role. The November election, which will determine control of the Senate, will be the biggest factor. If Democrats remain in the majority, there may be less urgency to push through nominees in a year-end session.
Interestingly, one explanation that has emerged for why the Biden administration offered the Republican FDIC picks with no corresponding Democrat is that the White House was making a goodwill gesture to minority leader Mitch McConnell as the two sides look to negotiate confirmations in the lame duck. That deal, which is still being worked on and has many elements, may not even involve the FDIC. Sources said the Biden push is mainly for judges. There was no guarantee that the FDIC Republicans – Jonathan McKernan and Travis Hill – would even get a vote, the sources add.
Not that Brown would likely allow McKernan and Hill to proceed on their own anyway… (Wednesday)
Seen Outside the SEC: There’s a small contingency of market participants who argue that naked short selling is an evil conspiracy ginned up by Wall Street to fleece the masses (and emphasis on “conspiracy;” these are the types who might even believe it could cause cancer and global warming). While this group may not be big, they are loud, and can occasionally be seen outside the SEC’s Washington headquarters handing out leaflets or carrying signs. We spotted this scene while heading to work:
The driver clearly hasn’t been reading Capitol Account, especially our articles on the SEC union and its opposition to employees being forced back to the office. Nobody is due back at the agency until January, and the building is pretty empty. Even Gensler often works at home. So there’s a good chance that few at the regulator saw the truck’s scrolling, digitized messages — or the plea to the SEC chief… (Wednesday)
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