By Suzanne Cosgrove
In testimony before the House of Representatives’ Committee on Financial Services Wednesday, SEC Chairman Gary Gensler reiterated his stance that the SEC needs to “freshen up” its rules to promote efficiency and competition in the more than $40 trillion equity markets.
“No regulation can be static in a dynamic society,” Gensler told the committee members, noting that quote was taken from a 1963 SEC study of the securities markets. He added that the 1960s study also recommended that “unanticipated changes in the markets and the broader public participation should be accompanied by corresponding investor protection.”
“Two years ago, we laid out a unified regulatory agenda to do just that,” Gensler said. “Included in that agenda were 10 items related to Congressional mandates, most from the Dodd-Frank Wall Street Reform and Consumer Protection Act and one from the Holding Foreign Companies Accountable Act. There were also items exercising new authorities granted under Dodd-Frank.”
The Commission has issued proposals for most of that agenda, he said, and it has finalized 24 rulemakings, “nearly all of which have changed based on public feedback.”
Gensler also pointed out the number of finalized rules under his tenure was less than several of his predecessors in a comparable timeframe – repeating a point he made at a hearing held by the Senate Committee on Banking, Housing and Urban Affairs earlier this month.
House Republicans set the table. Gensler made his remarks in the context of a letter released earlier this week by the House committee’s chairman, Patrick McHenry (R-N.C.), which implied the SEC’s rulemaking was far less deliberate than Gensler indicated.
Signed by McHenry and 28 other House Republicans, the letter stated the group was “troubled by the Commission’s reluctance to consider stakeholder feedback and its failure to conduct thorough economic analysis.”
The congressmen advised the Commission to stop finalizing or implementing rules “until it has comprehensively evaluated the real and cumulative impact of its rulemaking, including the impact on competition.”
But a stoppage by the regulator appears unlikely, barring a federal government shutdown.
Trade group lawsuit. Gensler noted the SEC’s recent slate of rulemaking included rules and rule amendments finalized in August designed to enhance the regulation of private fund advisers and update the existing compliance rule that applies to all investment advisers.
The final rules require private fund advisers registered with the Commission to provide investors with quarterly statements providing information regarding fund fees, expenses, and performance.
While McHenry said the Commission has overlooked the value of public input, Gensler said the final rule was adjusted “in multiple ways based on public feedback on the proposal.” Nonetheless, the final rules incited industry ire.
The Managed Funds Association, the National Association of Private Fund Managers, the National Venture Capital Association, the American Investment Council, the Alternative Investment Management Association, and the Loan Syndications & Trading Association joined in a lawsuit filed in the U.S. Court of Appeals for the Fifth Circuit against the SEC on September 1 that challenged the SEC’s new private fund rule, claiming the Commission had overstepped its statutory authority in its approval.
Crypto tokens tested. In his introductory remarks to Wednesday’s hearing, McHenry LAO charged the SEC chairman’s efforts to “choke off the digital-asset ecosystem has created real harm for consumers.”
The SEC chairman again stood firm. “As I’ve previously said, without prejudging any one token, the vast majority of crypto tokens likely meet the investment contract test,” Gensler told the House members. “Given that most crypto tokens are subject to the securities laws, it follows that most crypto intermediaries have to comply with securities laws as well.”
He said while the SEC has brought enforcement actions—some settled, and some in litigation—it also has addressed the crypto security markets through rulemaking, a comment that clearly addressed his critics who have charged the SEC with regulating crypto by enforcement alone.
“We issued a reopening release that reiterated the applicability of existing rules to platforms that trade crypto asset securities, including so-called ‘DeFi’ systems,” he noted. “While our current investment adviser custody rule already applies to crypto funds and securities, our proposal updating it would cover all crypto assets and enhance the protections that qualified custodians provide.”
Focus on climate risk disclosure. In addition, Gensler said the SEC’s staff is “considering carefully the more than 15,000 comments we’ve received” on its climate risk disclosure proposal.
“The SEC has no role as to climate risk itself,” he stressed. “We, however, do have an important role in helping to ensure that public companies make full, fair, and truthful disclosure about the material risks they face.”
A majority of the top thousand issuers by market cap already make climate risk disclosures, including Scope 1 and Scope 2 greenhouse gas emissions, Gensler said, adding that investors representing tens of trillions of dollars in assets are making decisions relying on those disclosures.
Fast-moving target. “Though we are blessed with the largest, most sophisticated, and most innovative capital markets in the world, even a gold medalist must keep training,” Gensler said. “We now live in the age of electronic trading and generative AI. We’ve had dramatic growth in the scale, size, and interconnectedness of our capital markets, with individual investors participating more than ever before.”