HOUSE APPROPRIATIONS COMMITTEE HEARING
OVERVIEW
For questions on the note below, please contact Edmund Perry at (202) 547-3035.
On May 18th, the House Agriculture Committee Subcommittee on Financial Services and General Government held an oversight hearing on the FY2023 budget for the Federal Trade Commission (FTC) and the Securities and Exchange Commission (SEC). The witnesses were FTC Chair Lina Khan and SEC Chairman Gary Gensler.
Below is a summary of the hearing prepared by Delta Strategy Group. It includes several high-level takeaways, followed by summaries of opening statements and witness testimonies and a summary of the Q&A portion of the hearing.
Key Takeaways
The following is a summary of some of the topics explored in today’s hearing. Each is discussed in further detail in the Discussion section below.
- SEC Chairman Gary Gensler said that the SEC’s rulemaking process includes a sufficient period of time for public comment and pushed back against suggestions that the SEC is releasing rulemaking proposals without adequate economic analysis or public input.
- Gensler said that the SEC’s recent climate risk disclosure rule proposal does not push a partisan agenda or impose unnecessarily stringent regulations. He said that the rule only services to provide comparability and clarity for climate disclosures that many large companies already make.
- Gensler said that, while there may be a few digital asset commodities, the vast majority of cryptocurrency tokens constitute an investment contract. He said that, if a cryptocurrency trading platform is offering even one such token, it must register with the SEC. He also said that the SEC plans to keep bringing robust enforcement in this space but would prefer to regulate through registration and preemptive rulings if possible.
SUMMARY
Opening Statements and Testimony
Chairman Mike Quigley (D-IL)
Unfortunately, these two agencies are severely under-resourced compared to the industries that they oversee. The SEC needs a budget increase to hire additional staff in the enforcement and examinations divisions to address a variety of emerging issues including cryptocurrency exchanges and tokens, increasing numbers of IPOs and SPACs, and a growing number of private funds. The SEC is also working to ensure that investors have the information they need relating to climate impacts. The SEC should consider changes to ensure a more expansive public comment process in its rulemakings.
Ranking Member Steve Womack (R-AR)
As we face unprecedented economic problems, it is not the time for financial regulators to add further economic burdens through ideological rulemakings that saddle American businesses with costly requirements. The SEC has been publishing far-reaching, complex rules without providing sufficient time for the public to react and respond to the impact of such rules.
The SEC should focus on its core responsibilities and deal with the myriad market issues that fall under them instead of pushing a partisan agenda. The SEC is involving itself in areas outside of its core mission such as climate change and political spending. These issues should be left to the EPA and FEC.
Gary Gensler, Chairman, SEC
Other countries are developing deep capital markets with the goal of surpassing us. We are also in the midst of uncertain geopolitical times that leave us concerned about cybersecurity risks. As central banks around the country shift from an accommodative phase to a tightening policy stance.
New financial technologies like predictive data analytics and cryptocurrencies continue to change the face of finance. We are seeing unprecedented market events such as market turbulence in March 2020, meme stock volatility, losses from speculative cryptocurrencies, and the collapse of Archegos Management. Given these trends, the SEC requires additional staffing and budget.
Discussion
SEC
Womack (R-AR): How does the SEC deal with the cost-benefit analysis requirement with so many rulemakings underway? Gensler: We include economic analysis in all of our rulemaking to consider how any rule would impact markets. We take considerable time writing these proposals and putting them out for public comment. We release rulemakings for 60 days on our website so that the public has plenty of time to comment. We have also extended comment periods if we feel we need more time for the public to comment. We need to hear from investors to understand whether these rules work.
Womack (R-AR): What is the difference between a digital asset security and a digital asset commodity? Where are you in creating a better regulatory framework for this system? Gensler: The SEC oversees an issuer marketplace. Congress gave us broad authority over any issuer raising money with expectations of a profit. A commodity does not have an issuer. We would be willing to work with the Commodity Futures Trading Commission (CFTC) to create that framework. To the extent that there is a crypto commodity token, and there may be a very small number of those, we expect the CFTC to have full authority. That said, we have jurisdiction over the vast majority number of tokens. Bitcoin may be a commodity token, so the CFTC should have authority over it. We have brought many enforcement actions in this industry, and we now have an enforcement group solely dedicated to cryptocurrencies. These products are highly speculative and vulnerable, and investors involved in this space are at risk.
Womack (R-AR): What is the SEC doing to ensure that the consolidated audit trail (CAT) is secure and protects private information? Gensler: We have stopped collecting some specific private information due to these concerns.
Quigley (D-IL): Has it been difficult to hire qualified staff? Gensler: We are seeing increased turnover due to the pandemic and a competitive hiring market.
Joyce (R-OH): Under your leadership, the SEC has pursued an aggressive agenda primarily concerned with investor protection without balancing its responsibility for capital formation. How will your climate rule impact investment in American energy companies? Gensler: I think that the SEC has a longstanding role in clarifying conversations between issuers and investors. Today, we have companies that already make climate disclosures, and I believe we have a role to play in ensuring that these disclosures are clear and comparable. We are not trying to create merit-based rules, but simply trying to clarify disclosures. This rule is about public companies reporting, not private companies. We are careful to ensure that small private companies will be subject to a tailored regulatory framework, so this rule does not disproportionately impact them. This is occurring around the globe. The materiality standard is the cornerstone of our disclosure rules.
Joyce (R-OH): How is it appropriate for the SEC to ramp up cryptocurrency enforcement efforts while there are still no clear regulations for industry participants? What benefits could blockchain technology offer our financial system? Gensler: There are very clear rules surrounding raising money from the public and disclosures. When a cryptocurrency exchange offers securities tokens, it has to register with the SEC. These exchanges are making markets against their customers. Very few entities in the financial sector have adopted blockchain technology because of the higher costs it requires to maintain a database. It also puts records out for more public viewing.
Cartwright (D-PA): Will you work with Congress to improve registered investment advisor arbitration processes? Gensler: I would be eager to work on this issue. Broker-dealers are subject to a self-regulatory organization, but investment advisors are not subject to this same requirement. If that were to change, it would have to come from Congress, not the SEC.
Amodei (R-NV): How many people on your staff are working on your ambitious rulemaking agenda? Why are your public comment periods shorter than in previous major rulemakings? Gensler: We have some vacancies on this staff, but we have rulemaking units of six to ten people in each program office. Our economist staff is also working on these rulemakings. We put rulemakings out for 60 days of public comments. We feel that we are giving adequate time for public comment, and we are receiving robust public input. We lengthen public comment periods if we feel it is necessary.
Lawrence (D-MI): What new tools will the SEC need to deal with the financial risks and fraud associated with cryptocurrencies? Gensler: This is a highly speculative asset class that has attracted public interest around the goal. It comes with many valuable innovations for the financial sector, but it must be held to our financial regulatory standards. There must be adequate disclosures for the public. Most ICOs are investment contracts and should be subject to securities laws. We are trying to work with cryptocurrency trading platforms to get them registered. We will continue to bring enforcement actions, but we would rather work through registration and preemptive actions.
FTC
Pocan (D-WI): Is concentration in the meatpacking industry leading to food price inflation. Should we be concerned about price gouging? Khan: We have a set of areas where we intersect with rural America. We have been investigating supply chain issues to ensure that there is no economic discrimination. We have also heard concerns regarding potentially unlawful repair restrictions on farm equipment.