Securities and Exchange Commission Chair Gary Gensler is testifying before the House Financial Services Committee today. It will be very much like his testimony two weeks ago to the Senate Banking Committee: a forum for Republicans to attack Gensler for being overzealous and overreaching in his rulemaking proposals.
Republicans are increasingly apoplectic about the more than 40 rules Gensler has been proposing, especially now that he has begun adopting them.
That’s not new. Republicans have been critical of Gensler from the get-go.
What’s different, nearly three years into the Biden administration, is that the financial services industry (hedge funds, mutual funds, market makers, trading firms, exchanges) are increasingly abandoning attempts to negotiate with Gensler and adopting a more confrontational stance.
Some are suing him.
“The industry (brokers and exchanges alike) are left with the only remaining tool at their disposal – a tool of last resort — litigation against the Commission,” Kirsten Wegner, CEO of the Modern Markets Initiative, wrote in a recent editorial in Trader’s Magazine.
The complaints from the industry have been mounting for over a year: too many rules. No time for industry input. No roundtable discussions. No sharing of data used to make the policy decisions.
The tone of the industry commentary toward Gensler has become increasingly hostile and bitter: “”Comment letters’ are a facade because it is all but impossible for the market to digest, process and respond to thousands of pages of draft regulation in only a few months’ time, and regardless, their points are often dismissed without meaningful study or explanation,” Wegner wrote.
Litigation starts
Last month, Grayscale Bitcoin Trust, which is seeking to convert to a bitcoin ETF, successfully sued the SEC on the grounds that it had already approved a “similar” product in bitcoin futures and its actions were arbitrary and capricious. The SEC is weighing an appeal.
Now that Gensler has adopted several of the rules that had been in the proposal stage, the industry has begun to take a more litigious stance.
For example, six financial trade associations this month sued the SEC over its new Private Funds Adviser Rule, which requires registered private fund advisers to undergo an annual financial statement audit. The trade associations claim the SEC exceeded its statutory authority and acted arbitrarily and capriciously.
Gensler also appears to be in open warfare with Virtu Financial, one of the world’s largest market makers. The SEC recently sued Virtu, claiming it failed to provide measures to protect sensitive customer data, and for making materially false and misleading statements regarding information barriers to prevent the misuse of that information.
These types of cases would normally result in a quiet settlement, but that doesn’t appear likely.
Virtu claims that this suit was an “escalation” of a years-long investigation because Virtu CEO Doug Cifu has been openly critical of the SEC’s market structure rule proposals, which have yet to be adopted.
“Unfortunately, the SEC’s position appears to be driven by politics and headlines rather than the facts and the law,” Cifu said in a recent statement. “Therefore, under these circumstances, we look forward to vigorously defending ourselves in court against these meritless allegations while maintaining our focus on serving clients and markets globally and creating long-term value for our shareholders.”
Gensler grilled for proposed and adopted rules
Republicans will be particularly keen to talk about some of the bigger issues Gensler has been tackling.
Take Climate-Related Disclosures, which were proposed in March 2022 but have not been adopted yet. They would require publicly-traded companies to disclose detailed emissions data and climate risk management strategies, including direct and indirect greenhouse gas emissions from their supply chains. Republicans have claimed this is beyond the SEC’s mandate. Gensler, in his prepared testimony, says the SEC “has no role as to climate risk itself. 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.”
Other rules that have been adopted (like cybersecurity, which mandates disclosure of a cybersecurity incident within four business days after a company determines the incident is material) will again be attacked for overreaching.
Then there’s crypto. Gensler has brought numerous enforcement actions against crypto intermediaries on the grounds that the tokens they offer are securities. Republicans will again attack him for over-reaching.
And what about that bitcoin ETF lawsuit? Gensler made it clear he “will not be able to comment on any active, ongoing litigation.” Translation: don’t ask about the bitcoin ETF lawsuit.
What’s next?
By now, it’s clear Gensler is not backing down and will continue passing new rules because he has a 3-2 majority at the commission.
Gensler will repeat that he is being reasonable and listening to industry complaints. On the climate change proposal, for example, Gensler noted that the SEC has received more than 15,000 comments and that it “will consider adjustments to the proposed rule that the staff, and ultimately the Commission, think are appropriate in light of those comments.”
Given what has happened already, that will not mollify the critics.
Some are hoping that a few Democrats will join the Republicans and ask Gensler to slow down. Last year, a dozen Senate Democrats did just that, sending a letter to Gensler urging him to extend the deadlines for proposed rules and to provide a sufficient period for notice and comment.
Last night, 32 members of Congress (16 Republicans, 16 Democrats) sent a letter to the SEC expressing concerns about the approach the SEC is taking on equity market structure proposals it made in December 2022 but has yet to adopt, arguing that the economic analysis the SEC is relying on is incomplete.
It’s not clear if this will sway Gensler on this particular rule proposal.
Now that he has begun adopting many of these rules, the financial services industry seems to be saying, “See you in court.”
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