Grading Gensler: SEC Advocates Offer Some Takes Two Years In
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Capitol Account isn’t one of those Washington newsletters that highlights people’s birthdays. We prefer to focus on real news. But there was one anniversary this week that we couldn’t ignore: Gary Gensler’s second year as SEC chair.
Gensler was sworn in on April 17, 2021, and it’s been go-go-go ever since. Most notable, of course, is the 50-plus rules agenda that he seems pretty intent on completing. It hits all corners of the financial system and wide swaths of the industry – hedge funds, mutual funds, high-frequency trading firms and stock exchanges, to name a few. And it doesn’t shy away from big, controversial issues like climate change disclosures or a full remake of equity market structure. Then there is the proverbial elephant in the room, digital assets. There was already a fire burning in that dumpster before FTX’s collapse turned it into an inferno. There still haven’t been any rules on crypto, but there has been plenty of enforcement. And more to come.
Looking to get an assessment on Gensler’s tenure so far, as well as to peer a bit into the future, we turned our regular Friday Q and A feature over to some of the most prominent advocates who regularly weigh in on SEC policy. Some are big supporters; others are opponents. Though they pay attention to different issues, all of them are passionate about what’s going on at the agency.
Thanks for reading the free Saturday edition of our newsletter. We had a lot of other stories this past week, including an extensive write-up of Gensler’s marathon testimony, the first article on the SEC IG report on the agency’s computer glitch that caused comment letters on almost a dozen rules to go missing and a deep look at Wall Street’s response to the FTC’s proposed ban on non-competes. If you’d like to read those and get our coverage in a more timely manner, we’d love to have you subscribe.
Now On to the Report Card: We asked three questions: What’s your top line view of the first two years? What’s most important to you on Gensler’s to-do list? How much of his agenda is likely to be enacted? We also asked for a letter grade on the job he’s done. (As you’ll see, there’s a pretty big range. Whoever heard of an F minus, by the way?)
Anybody who watched Gensler’s appearance this week before the Republican-led House Financial Services Committee (talk about an anniversary present) knows that he has emerged as a polarizing figure in this already polarized era in Washington. That’s also obvious in our, admittedly unscientific, survey. Take the results however you see fit. We hope it will be, at minimum, a fun and informative read. (Friday)
Bryan Corbett, president of the Managed Funds Association.
Top line: We are really seeing an unprecedented attack on the alternative asset management industry – 20-plus rules…But there is no legislation, no market event that triggers it. We are concerned about insufficient cost-benefit analysis, not only with individual rules but when you look at them in totality. Sometimes the rules conflict with each other…Implementing these rules will be so expensive and costly that what Gensler is looking to do, in our view, will result in the big firms getting bigger…A letter grade? I’ll leave that to others.
Watching: We are concerned about some of the disclosures around equity positions, such as the security-based swaps reporting requirement. [And] how investment managers contract with their limited partners and the allocators, the people who give managers capital to invest – the private fund adviser rule. This SEC intermediation between sophisticated parties is an overreach. [Also proposals] around a fund’s operations – the cyber rule, the custody rule, and importantly, the dealer rule. The dealer rule is where the SEC is threatening to have a registered investment adviser also be registered as a broker dealer. It basically makes a fund manager model almost impossible to operate.
Future: Our sense is Gensler is going to try and pass a lot of this…Congress and the SEC’s IG have been raising concerns. Even the SEC’s own IT system broke down under the weight of what they are doing. There are lots of flashing yellow lights, yet Gensler seems very focused on trying to push through his agenda. We’ll see how this plays out. With 20-plus rules, we think there are several that rise to the level of litigation if they come out in a form that the industry can’t implement. We’re not there yet, but we are preparing for the possibility.
Eric Pan, president of the Investment Company Institute, which represents mutual funds.
Top line: It’s only midway through the administration, so it’s hard to give the chair a final grade – but he is not trending well. He is not showing a willingness to accept constructive feedback from market participants, and many of his proposals seem to be based on guesswork rather than being evidence-based. I’ve called this ‘regulation by hypothesis’ – the idea that many of the proposals are based on theories.
Watching: ICI members are very concerned by the liquidity risk management proposal, including the mandatory swing pricing and hard close elements. This proposal would be harmful to mutual funds – and the more than 100 million Americans who invest in mutual funds. Our members are also concerned about the fund names rule, the ESG funds disclosure rule, and the outsourcing rule, to name a few. This is an incredibly active SEC.
Future: Without the benefit of a crystal ball, it’s hard to say. We do know that the chair is very driven and committed. I know the SEC staff are working very hard. Democrats and Republicans in Congress have a lot of questions about the chair’s agenda. It is critical that the chair respects the oversight of Congress and takes their concerns seriously.
Chris Iacovella, president of the American Securities Association, which represents mid-size brokerage firms.
Top line: Under Gensler’s leadership, the agency has stretched the limits of its legal authority in numerous areas, engaged in legally questionable industry sweeps of personal texts, unilaterally decided it can regulate where it has no authority to do so, used incorrect cost estimates in rule proposals, injected politics into the boardroom of every public company and greenlighted the violation of every American investor’s right to privacy. All of that is testing the public’s trust and patience – and the integrity of the institution. So he gets a D+.
Watching: We are eagerly awaiting the SEC’s final rule on the Consolidated Audit Trail to see whether it puts a stop to one of the most egregious constitutional violations of individual privacy rights we have ever seen by a regulator. To do that, the rule must end the collection of the personal and financial information of every American investor by a centralized database in Washington that hackers and cybercriminals will use as target practice. We also care deeply about the market structure rules…and the agency taking action to remove companies controlled by the Chinese Communist Party from our markets.
Future: Half to less than half [of Gensler’s agenda will be finalized]. Many of these rules are blatantly illegal and/or cannot pass a basic cost-benefit analysis.
Lynn Turner, a former SEC chief accountant and longtime investor advocate.
Top line: [Gensler is doing] much better than the grade I would give the other four commissioners or Congress – especially after the FTX crypto debacle cost so many citizens so much money.
Watching: ESG – climate related disclosures, as I do not want to join the dinosaurs. But the chair needs to trim some of the ornaments off the Christmas tree to avoid the proposal being vacated by the (not so) Supreme Court. Also `market plumbing,’ the routing of orders placed by investors. In concept, I strongly support it but there is some plumbing yet to be done to avoid some leaky pipes.
Future: The chair has been in his seat for 24 months – a relatively short period of time. In addition, it takes a majority vote of the five commissioners to adopt change. Often change does not come easy, but some progress has already occurred and continues to occur. Some items on the agenda have been adopted and I have no doubt more will be. However, as with all SEC chairmen and chairwomen, there are usually things left to be accomplished by future chairs and generations.
Doug Cifu, CEO of Virtu Financial.
Top line: I’d give him a solid A for his media tactics, partisan politics, and commitment to ignoring the data and decades of expertise at the expense of investors, clarity to the market place and capital formation.
Watching: The SEC’s tone-deaf politically motivated proposals will impose billions of dollars of costs on investors and reduce today’s low-cost access to our capital markets.
Future: Only the proposals supported by data and robust economic analysis have a chance of being enacted. The chair’s baseless, politically driven proposals stand little chance of surviving an appeal. In the end, this will be an enormous waste of taxpayer money – just think of how many people could have been fed, sheltered or educated for what the SEC is spending on Gensler’s political agenda.
Jeff Hauser, director of the Revolving Door Project, a progressive group that focuses on executive branch appointments and corporate political influence.
Top line: I'd give him a B+ for the job he is doing – but bump it up to an A- or A when taking into account the degraded nature of the institution he took over and the headwinds from conservative courts and industry controlled members of Congress from both parties. Tough job, real progress.
Watching: Gensler's refusal to generate rules to retroactively justify the crypto industry's disregard for democratic governance has been the highlight of his tenure. It's so easy to imagine a Mary Schapiro or Mary Jo White type giving FTX and Coinbase 75 percent of what they wanted and posturing as tough when FTX imploded. Instead, we have crypto threatening to remove their make-believe industry from the United States. Which, honestly, would be a terrific outcome!
Future: The bulk of Gensler's agenda will survive – if Biden gets a second term – since the judiciary will tilt Democratic and the president's veto pen will protect the SEC from the effect of lobbyists on the Hill. Less than half, if a Republican takes office in 2025.
Tom Quaadman, executive vice president of the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness.
Top line: I would give him an incomplete. A lot of the major proposals out there haven't been finalized. The IG report does not paint a pretty picture as to the use of staff resources and the ability of the staff to actually get through that agenda. So we haven’t seen a lot come to fruition. And there have been process issues, including the short comment periods. On the other hand, Gensler and his staff – for the most part – have also had a very open door. So there has been a lot of give and take.
Watching: Climate. When you take a look at the proposal, the potential cost of this one disclosure regime is two and a half times all the other disclosures combined. That would have an enormous impact. A couple of others that are going to have a big impact are, obviously, market structure and cyber disclosure. And I know it’s a bit arcane, but the SEC is now allowing shareholder proposals that have a broad societal impact to move forward. Lastly, the failure to have any specific crypto proposals.
Future: Here’s the problem: When you have a 50-plus proposal agenda, it really means nothing is a priority. So Gensler hasn’t really set forth what are the most important things that he wants to accomplish…It's going to take us a while to assess his ultimate success, because the courts are going to have an important role to play in all of this.
Ty Gellasch, president of the Healthy Markets Association, a coalition of institutional investors.
Top line: B [grade]. The capital markets have been rapidly evolving for decades and the SEC's been largely asleep at the switch. The chair had an enormous task of ‘must do’ items when he took the job – and he quickly established the most aggressive, pro-investor agenda in the agency's history. The chair is wisely focused on making even incremental progress on many fronts, rather than focusing on just a few issues. However, that means many of the rules are likely to fall short of investors' wish list.
Watching: It's hard to look at the agency's agenda and not think everything on it is a top priority. Certainly, reforms to market plumbing, the best execution rule, climate-related disclosures and private markets reforms are all very important for millions of investors and Healthy Markets Association members. In all cases, the proposals seem to be well-intentioned, but somewhat over-complicated and more limited than we might hope. If investors need information, make sure they get it. And if you are concerned brokers are putting their own financial interests ahead of their customers, then stop it.
Future: Of the enormous agenda, it seems likely that over 90 percent of the rules will be finalized in some form. Several very important rules for investors have already been finalized, such as the universal proxy ballot. In some cases, the final rules may look a lot like the proposals. But with a lot of them, we're expecting a lot of the more controversial bits to be sanded off. And, of course, anything that might upend existing businesses is likely to end up in court. But that's well beyond the chair's control. His job is to get the rules out as best as he can.
Miller Whitehouse-Levine, CEO of the DeFi Education Fund, a research and advocacy organization that promotes decentralized finance.
Top line: F- [grade]. Chair Gensler has morphed the SEC from being the gold standard of financial regulators – an agency that protects American investors and the primacy of its capital markets by adapting its statutorily-authorized regulations to innovative technologies – to being an agency that actively engages in merit-based policymaking. That approach is undermining the SEC’s pursuit of its mission and its credibility already. And in turn, it risks doing lasting damage to the agency and the markets it oversees.
Watching: The SEC’s ATS/exchange proposal is emblematic of the SEC’s new-found policymaking powers and its disingenuous approach to crypto more broadly. The SEC claims that it is crystal clear everything is within its jurisdiction – and then the agency subsequently makes clear that there is no path to compliance available for anyone or anything that touches a blockchain-based asset. Indeed, this rulemaking proposes that `communication protocol systems’ (a novel and intentionally ambiguous term the proposal does not define) could be national securities exchanges and does not consider whether so-called communication protocol systems could comply with a regulatory regime designed for businesses like the NYSE. Simply put, if you have to exempt cellphones from the definition of a national securities exchange, something has gone very wrong.
Future: It’s too soon to tell, but Chair Gensler’s greatest legacy may be reshaping administrative law in fundamental ways.
Kristin Smith, CEO of the Blockchain Association, which represents more than 100 cryptocurrency companies.
Top line: Chair Gensler receives an F for his antagonistic and opaque approach to regulation of the crypto industry. U.S.-based companies are pleading for clear guidance from Washington, but instead are met with a harmful regulation by enforcement strategy from the SEC – driving jobs and tax revenue offshore.
Watching: The SEC has proposed sweeping changes to the current custody rule framework and the current ATS rule that would drastically impact the crypto industry. These proposals don’t take into account the unique nature of blockchain technology and serve to hinder innovation in the industry under the guise of investor protection. In reality, if these rules are finalized in their current form, investors and market participants will have fewer safe and regulated options.
Future: Washington’s clear disapproval of Chair Gensler’s current strategy will hopefully slow his agenda.
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