SEC Chair Gensler Makes his Case before House Financial Services Committee

In testimony before the House Financial Services Committee, SEC Chair Gary Gensler highlighted regulatory initiatives on equity markets and private funds, artificial intelligence and predictive data analytics, crypto assets, and climate change disclosure.

Mr. Gensler highlighted regulatory action taken by the SEC intended to enhance "efficiency, integrity, and resiliency" in the securities markets:

• Equity Markets and Private Funds. Mr. Gensler said that it was "appropriate" to update rules governing the equity markets given the $40 trillion American households have invested. He highlighted the SEC proposals (i) amending best execution standards to cover all sectors of the securities market, (ii) amending Regulation NMS Rule 605 (see previous coverage) regarding order execution quality, (iii) "harmoniz[ing]" the minimum price increment for quoting and transacting stocks and (iv) increasing competition for individual investors’ marketable orders. Mr. Gensler added that the SEC proposed amendments to private fund adviser requirements concerning investor reporting on fees, expenses and performance.

• Artificial Intelligence and Predictive Data Analytics. Mr. Gensler cautioned that while predictive data analytics can benefit investors through market access, efficiency and increased returns, advisers can also use the analytics for their own benefit. Mr. Gensler said that SEC staff is considering rule proposals on how to address these potential conflicts.

• Crypto Assets. Because crypto intermediaries often act simultaneously as an exchange, broker-dealer and/or clearing agency, Mr. Gensler warned of the "inherent conflict" of intermediaries commingling various functions within the securities market. He reaffirmed that the "vast majority" of crypto tokens are securities and that intermediaries, whether they are centralized or decentralized, are subject to securities laws. Further, he argued that crypto investors should be able to benefit from securities compliance.

• Climate Risk Disclosure. Mr. Gensler also highlighted that the SEC proposed amendments to implement "consistent and comparable" climate risk disclosures by public companies, arguing that investors who manage "tens of trillions of dollars" in assets rely on climate disclosures when making investment decisions (see previous coverage).

Mr. Gensler also underscored the SEC’s work to bolster market resiliency through several proposals concerning clearinghouse governance, risk management, use of service providers and wind-down plans.

Responses to SEC Chair Gary Gensler

Republican members of the Committee expressed vehement opposition to Chair Gensler's regulatory agenda. Many characterized the SEC Chair's efforts as implementing a "radical regulatory agenda."

In a joint letter criticizing Mr. Gensler’s approach to digital assets, legislators complained about Mr. Gensler's imposition of a regulatory framework on market participants that is "neither compatible with underlying technology nor applicable" if a firm’s activities do not involve securities. Further, critics said that the SEC’s push for firms involved in digital assets to register with the agency is a "willful misrepresentation of the SEC’s non-existent registration process."

Additionally, House Financial Services Subcommittee on Capital Markets Chair Ann Wagner (MO-R), along with House Financial Services Subcommittee on Oversight and Investigations Chair Bill Huizenga (MI-R) and House Financial Services Committee Chair Patrick McHenry (NC-R) (see here, here and here) expressed opposition to the SEC's agenda raising concern over the (i) potential impact and "undue barriers" of the "large number" of SEC proposals on smaller companies and those potentially entering the public markets, (ii) "radical regulatory agenda" pursued by Mr. Gensler which the legislators said the SEC "has no power to act . . . unless and until Congress authorizes it to do so by statute" and (iii) failure to encourage capital formation, and criticizing recent SEC proposals, which do not "directly promote capital formation" and create "costly regulatory disclosure requirements."