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SEC Chair Gary Gensler Testifies on Regulatory Priorities

Steven.Lofchie@cwt.com's picture
Commentary by Steven Lofchie

In testimony before the U.S. Senate Banking Committee, SEC Chair Gary Gensler weighed in on market structure, predictive data analytics, issuers and issuer disclosure, and funds and investment management.

On market structure, Mr. Gensler outlined his requests to SEC staff on recommendations to better enhance resiliency and competition in the fixed income, equities, security-based swaps and crypto assets markets. He stated that he asked staff to consider (i) initiatives on Treasury trading platforms and (ii) how to ensure that firms that "significantly trade" in the Treasury market are SEC-registered broker-dealers.

With regard to the crypto assets market, Mr. Gensler stated that he directed staff to consider what interagency action could be taken under current authorities, what regulatory gaps remain, and potential legislative solutions. He also suggested that crypto trading platforms engage with the SEC to determine whether their offerings are securities, though he stated: "while each token's legal status depends on its own facts and circumstances, the probability is quite remote that, with 50, 100, or 1,000 tokens, any given platform has zero securities. Make no mistake: To the extent that there are securities on these trading platforms, under our laws they have to register with the Commission unless they qualify for an exemption." On predictive data analytics, Mr. Gensler expressed concern that new models and artificial intelligence could lead to greater concentration of data sources, herding, and interconnectedness.

On issuer disclosure, Mr. Gensler highlighted the following areas to which the SEC is looking to bring greater transparency: (i) special purpose acquisition companies ("SPACs") and the inherent conflicts of interest within SPAC structures; (ii) issuers located in China and Hong Kong that do not comply with inspections by the Public Company Accounting Oversight Board; and (iii) trading by corporate insiders, by modernizing SEA Rule 10b5-1 ("Trading 'on the basis of' material nonpublic information in insider trading cases").

On funds and investment management, Mr. Gensler testified that he asked staff to consider reforms to cybersecurity risk governance, including cyber hygiene and incident reporting, and enhanced disclosures for pension funds investing in private funds. In addition, he stated that the SEC will be assessing the type of information used to substantiate environmental, social, and governance claims.

Mr. Gensler reported that the SEC Division of Enforcement is "on track to exceed the number of stand-alone actions against wrongdoers" and the SEC Division of Examinations is set to complete approximately 3,000 examinations. He argued for additional resources, noting a nearly four percent decrease since the end of fiscal year 2016.

Commentary

To encourage the development of crypto technologies, Chair Gensler should be far more explicit as to which products he believes are NOT securities and why. Otherwise, there is simply the assumption that the SEC will consider any product a security and, therefore, there is no benefit in asking the SEC's view.

This is not to suggest that none of the crypto products trading on the market are, in fact, securities. Recent news involving Coinbase and the SEC suggests that the SEC's position, insofar as the facts in those cases are known, is reasonable. But being right on a single set of facts is not a sufficient measure of a regulator's conduct. The regulatory agency has an obligation to explain itself and to lay down some guidance as to what types of conduct may be permissible. Mr. Gensler's testimony, that out of 100 tokens surely one must be a security, may be a reasonable bet, but it is not a useful guide in the absence of an explanation as to why that token is a security. The SEC's obligation to the market is to provide guidance as to specific types of permissible conduct and products, and the SEC should not be satisfied with the issuance of general threats of enforcement.

In any case, Mr. Gensler is clear that he intends for the SEC to be aggressive in adopting new regulations, as well as in enforcement. As to the new regulations, his statement that the SEC should ensure that firms that trade significantly in government securities should register as broker-dealers is a notable one. It has long been the position of the SEC that mere volume of trading does not require an entity to register as a broker-dealer. If there is some intention to reverse that position, it should come through legislation, not regulatory interpretation.

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