HOUSE FINANCIAL SERVICES COMMITTEE HEARING
OVERVIEW
For questions on the note below, please contact Edmund Perry at (202) 547-3035 or Ruth Lunsford at (434) 238-7224.
On September 24, the House Committee on Financial Services held a hearing entitled “Oversight of the Securities and Exchange Commission.” Witnesses in the hearing were:
- Gary Gensler, Chairman, U.S. Securities and Exchange Commission
- Hester Peirce, Commissioner, U.S. Securities and Exchange Commission
- Caroline Crenshaw, Commissioner, U.S. Securities and Exchange Commission
- Mark Uyeda, Commissioner, U.S. Securities and Exchange Commission
- Jamie Lizárraga, Commissioner, U.S. Securities and Exchange Commission
Legislation noticed for the hearing:
- H.R. 9477, the “SEC Review Act”
- H.R. 7092, the “Protecting Private Job Creators Act”
- H.R. 6695, the “Due Process Restoration Act of 2023”
- H.R. 9342, the “Securities Enforcement Clarity Act of 2024”
- H.R. 9148, the “Tailoring for Main Street Investors Act”
- H.R. 6623, the “Main Street Growth Act”
- H.R. 5741, the “Uniform Treatment of Custodial Assets Act”
- H.R. 9578, the “Bridging Regulation and Innovation for Digital Global and Electronic (BRIDGE) Digital Assets Act”
- H.R. ___, the “Securing Innovation in Financial Regulation Act”
- H.R. ___, To require the Commodity Futures Trading Commission and the Securities and Exchange Commission to conduct a study to assess whether additional guidance or rules are necessary to facilitate the development of tokenized securities and derivatives products, and for other purposes
- H.R. ___, To codify the special purpose broker dealer, and for other purposes
- H.R. ___, the “New Frontiers in Technology (NFT) Act”
- H.R. ___, To require the Securities and Exchange Commission, Commodity Futures Trading Commission, and the Secretary of the Treasury to jointly carry out a study on decentralized finance
- H.R. ___, To amend the Securities Exchange Act of 1934 to exclude decentralized finance activities from that Act, and for other purposes
Below is a summary of the hearing prepared by Delta Strategy Group. It includes several high-level takeaways from both panels, 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 the main topics explored in today’s hearing. Each is discussed in further detail in the Discussion section below.
- Members on both sides of the aisle called for the SEC to cease its partisan rulemaking and return to its statutory mission as an advocate for investors in capital markets.
- Over 250 bipartisan members of Congress, including strong critics like Representatives Tom Emmer (R-MN-06) and Warren Davidson (R-OH-08), oppose Chairman Gary Gensler’s regulatory approach, especially regarding digital assets. On Monday, a letter was sent to Chairman Gensler voicing strong opposition to his regulatory approach, specifically in regard to Staff Accounting Bulletin No. 121 (SAB 121).
- Chairman Gensler denied that the government was involved with an “Operation Choke Point 2.0” to stifle the crypto industry, saying that the SEC has been working to address a culture of noncompliance within the digital asset industry. SEC Commissioner Hester Peirce criticized the lack of regulatory clarity the SEC has offered regarding whether certain crypto tokens qualify as securities and placed the blame for the lack of clarity on Chairman Gensler’s agenda.
- Republicans, including Committee Chairman Patrick McHenry (R-NC-10) and Representative Ann Wagner (R-MO-02), argued Chairman Gensler has transformed the SEC into a “rogue agency,” overstepping its authority and rushing rulemakings that are often overturned in court. Representative Davidson, claimed Gensler’s approach is harming capital markets and investor confidence, hindering innovation and creating regulatory confusion.
- Democrats, led by Ranking Member Maxine Waters (D-CA-43), voiced support for Chairman Gensler, particularly for the enforcement actions the SEC has brought under his leadership, emphasizing their role in investor protection. Representative Waters and Representative Sherman (D-CA-32) praised Gensler’s efforts to enhance transparency and address risks from emerging technologies, advocating for continued strong regulations.
- Bipartisan concerns included the SEC’s safeguarding custody proposal, the lack of progress in equity market structure proposals, and the timeline for the Treasury clearing rulemaking. Several lawmakers, including Commissioner Uyeda in his testimony, noted that shortened comment periods and simultaneous rule proposals undermine thorough stakeholder engagement and lead to poorly crafted regulations.
SUMMARY
Opening Statements and Testimony
Chairman Patrick McHenry (R-NC-10)
The SEC is an independent agency led by a bipartisan Commission, making it essential for Congress and the public to hear from all five commissioners. This is their first testimony since 2019, during which the SEC has seen significant changes, often for the worse under Chair Gensler. Critics argue that Gensler’s leadership has made the SEC a “rogue agency,” overstepping its authority and negatively impacting capital markets. Federal judges have challenged Gensler’s actions, overturning multiple rulemakings. Over 250 bipartisan members of Congress have expressed opposition to his proposals, which often lack proper justification, and more than two-thirds of the House, including 71 Democrats, rejected Gensler’s approach to digital assets. Gensler has doubled down on regulation by enforcement, ignoring the bipartisan consensus. Without the regulatory clarity and consumer protections in the Financial Innovation and Technology Act for the 21st Century Act (FIT21), the U.S. will continue to fall behind Europe in technological innovation and adoption which is an unprecedented situation in modern history. Gensler’s record clearly indicates that his legacy will be defined by turning the once proud institution of the SEC into a rogue agency.
Ranking Member Maxine Waters (D-CA-43)
Despite ongoing attacks from Republicans, the SEC has fulfilled its mission of protecting investors and maintaining our capital markets’ global reputation. Since Chair Gensler took office, the SEC has initiated 784 enforcement actions, resulting in nearly $5 billion in fines, which underscores the agency’s commitment to holding bad actors accountable and ensuring a fair marketplace for all businesses and investors.
Chair Gensler has also prioritized transparency and investor protection, addressing critical issues such as market integrity and the risks posed by emerging technologies. I hope the SEC will continue to advance important disclosures, such as human capital and diversity metrics, which are not only desired by investors but also beneficial for long-term business success. These measures align with our values and promote a more equitable economy. While the SEC and the Biden administration have been diligently working to enhance regulations and consumer protections, I cannot say the same for House Republicans. We have worked tirelessly to reach an agreement on the most effective regulatory approaches, making concessions along the way, and I believe we can prioritize strong protections for consumers and robust federal oversight. It is time to prioritize the needs of the American people over political gamesmanship.
Capital Markets Subcommittee Chairman Ann Wagner (R-MO-02)
Under Chairman Gensler’s leadership, the SEC has effectively sidelined public stakeholders from the rulemaking process. Their rushed approach is resulting in poorly crafted regulations that are frequently overturned by the courts. It isclear that when it comes to regulating our capital markets, Chairman Gensler’s agenda at the SEC prioritizes moving fast over careful consideration, leading to the risk of “breaking things” rather than fostering a stable and effective regulatory environment.
Representative Brad Sherman (D-CA-32)
The SEC remains the premier agency for protecting investors, overseeing virtually every intangible investment asset. We could pass additional legislation to clarify that cryptocurrencies are securities and should abide by securities laws.
SEC Chairman Gary Gensler (Joint Testimony)
The SEC oversees capital markets, working to deter fraud and manipulation while ensuring that investment advisors fulfill their duties to clients and that companies and entrepreneurs can access the capital they need. Our mission is threefold: protect investors, maintain fair and efficient markets, and facilitate capital formation. Everyday investors benefit from these markets, impacting their investment portfolios, home purchases, college education, and retirement savings. With an appropriation of about $2.1 billion, we’ve been flat-funded like many government agencies. However, we also generate revenue through fees on stock and other transactions, allowing us to remain deficit neutral. The SEC is a remarkable agency, dedicated to serving investors and fostering innovation.
DISCUSSION
McHenry (R-NC-10): How do you differentiate between crypto securities and commodities? Is the use of multiple terms due to a lack of regulatory clarity on which tokens may be offered as investment contracts? Gensler: It is less about the terms and more about the economics, as defined by the Howey test regarding investment contracts; Peirce: The SEC has been ambiguous, as legal precision has significant implications. This has left us without clarity on whether a token itself is a security, which we should have clarified earlier.
Waters (D-CA-43): Have you resolved the issues highlighted by the Robinhood “meme-investment” incident? Can you discuss recent reforms and how they increase competition and market integrity? Gensler: The issue stemmed from clearinghouse relationships, and the shortened settlement cycle will help prevent future occurrences. We have made several key reforms, such as relaxing market quoting restrictions and shortening the settlement cycle, which helps both investors and capital formation.
Hill (R-AR-02): Over two-thirds of the committee have rejected the SEC’s digital asset regulatory approach. Is regulation by enforcement superior to statutory direction from Congress? Peirce: This approach is inefficient and leaves everyone unclear about our authority; we should focus our enforcement on areas with clear authority; Lizárraga: I defer to Congress on whether a new framework is needed. We are following existing laws to address market violations.
Lucas (R-OK-03): Regarding proposed Rule 10B-1 on security-based swaps, is the Commission considering bipartisan feedback? Gensler: Yes, your feedback was helpful in drafting the original rule. We continue to consult on reporting transparency for larger positions, and we’re considering whether to keep some reporting private. We have a 2.5-year timeline, working closely with the Treasury and the Federal Reserve, especially for the $28 trillion Treasury market, to enhance efficiency.
Lucas (R-OK-03): Can you share your perspective on the Treasury clearing timeline? Peirce: I did not support the rule initially but am now committed to sound implementation. I think we should be open to extending timelines and involve industry and other regulators closely.
Cleaver (D-MO-05): If we are not intentional in rulemaking, powerful AI systems could dominate human decision-making. What should we do about AI? Gensler: AI is transformative but poses challenges. Most of the financial industry relies on just two major cloud providers, which dominate AI development; Peirce: While skepticism is warranted, we should also recognize AI’s potential to help us regulate better and serve more people at lower costs.
Sessions (R-TX-17): The SEC lacks fairness and balance, engaging in selective enforcement. Should individuals who unintentionally violate regulations be able to navigate regulatory challenges more easily? Gensler: I am proud of our agency and the hardworking staff who strive for fairness in enforcement.
Foster (D-IL-11): Price discovery is foundational for investor confidence, yet social media can unduly influence equity pricing, especially with AI-generated misinformation. Should we revisit short selling regulations to address these manipulations? Gensler: Fraud is fraud, regardless of the model used. It is essential to consider the responsibilities of those deploying these models. Wagner (R-MO-02): The SEC has extracted huge settlements related to off-channel communications, amounting to over $3 billion in fines. Has any fraud or customer harm been found, and what are these fines based on? Peirce: These cases often arise from record-keeping issues, not fraud. We should focus on regulatory work first, not enforcement.
Wagner (R-MO-02): Retail investors can invest in private funds via closed-end funds, but SEC staff has informally restricted this. Why is that? Uyeda: I find the staff’s position frustrating. Diversification is important, especially for retirement investors.
Lynch (D-MA-08): You have spoken about the risks of vertical integration in crypto. Can you elaborate on those concerns and your stance on proposed market structure legislation? Gensler: It is crucial that exchanges are separate from broker-dealers to prevent conflicts of interest, as seen in the FTX collapse.
Barr (R-KY-06): Can you identify any statutory authority granting the SEC the power to compel disclosures on immaterial environmental or social issues? Peirce: I am concerned about moving beyond materiality; we may be on shaky legal ground when we do so. Our baseline is materiality; if Congress wants us to address immaterial disclosures, they need to direct us to do so.
Williams (R-TX-25): Have you consulted with economic bodies about the impact of regulatory requirements on investors? Gensler: We analyze rules economically and seek feedback from small businesses and the Treasury on many rules, while maintaining independence; Peirce: Small businesses face disproportionate effects, and we could do more to accommodate them.
Davidson (R-OH-08): Do you discuss strategies like Operation Chokepoint 2.0 to restrict crypto firms? Gensler: I’m not familiar with that term, but we’ve seen both good and bad outcomes from our rules. Davidson: Has SEC staff directed FINRA to block crypto applications? Uyeda: No, there’s no directive; Peirce: There is a clear message from the SEC against moving the crypto industry forward.
Torres (D-NY-15): Is there a legal difference between a Yankee ticket and an NFT experience? Can the SEC require NFTs to register without violating First Amendment concerns? Gensler: Courts have clarified ticket purchases as an offer and sale. I prefer not to comment on specific cases; Crenshaw: Registration applies only to securities under SEC jurisdiction. Torres: Should the SEC avoid chilling effects under the First Amendment? Crenshaw: We can collaborate to support industry interests and maintain market integrity.
Rose (D-NY-15): Can you share concerns about the SEC’s digital asset regulation approach? Can special purpose broker-dealers custody unregistered digital assets? Gensler: No, they cannot custody non-securities; Peirce: Enforcement has taken precedence over regulation, which should include clearer guidance and collaboration with the CFTC.
Nickel (D-NC-13): Do you agree with Vice President Harris that the U.S. should encourage innovative technologies like digital assets while protecting investors and consumers? Do you have regrets about supporting SAB 121? Crenshaw, Lizárraga, Peirce, Uyeda: Yes; Gensler: Promoting innovation is important, but protecting investors is more so. The staff accounting bulletin has helped public companies understand liabilities in light of multiple bankruptcies.
Meuser (R-PA-09): Why is the SEC rushing equity market structure changes without waiting for updated 605 trading data? Gensler: We’re addressing a restriction from 20 years ago to lower market costs; Peirce: I supported the tick-sizes rule but want to ensure it does not have adverse effects.
Gottheimer (D-NJ-05): Why did the SEC staff refuse to provide technical assistance on digital asset legislation? Gensler: We did provide technical assistance.
Kim (R-CA-40): How does the SEC account for the overlap between new and existing rules? Peirce: We consider existing rules but not proposals currently out for comment, which can lead to confusion; Donalds (R-FL-19): How would a digital asset sandbox function within the FIT for the 21st Century Act? Peirce: It would allow for small-scale testing without extensive SEC approval processes.
Timmons (R-SC-04): What is the differentiating factor between how the SEC considers physical art as opposed to NFTs? Crenshaw: We seem to be treating digital assets differently than we treat physical assets, and I think that’s problematic; Peirce: When we look at digital assets, we are saying they are being sold as part of securities transactions because there’s an investment contract associated with it. It seems to me that we are doing that on the crypto side, and it does not make sense to me because I do not see the parallel on the physical side.
Flood (R-NE-01): Why wouldn’t the SEC simply rescind SAB 121 entirely or issue new guidance? Gensler: The accounting bulletin is about protecting investors in the case of a bankruptcy for a crypto company; Peirce: We should go back to the drawing board. We need to figure out what the right accounting is in this area, involving the public in a process—not just putting out a staff bulletin. There i only one custodian for the ETP space, and one reason is because of SAB 121, which makes it very hard for people to be custodians in this space.
Lawler (R-NY-17): In your opinion, is the SEC under Chair Gensler no longer the gold standard of market regulation? Uyeda: Unfortunately, our condition today in rulemaking is below average.
Nunn (R-IO-03): Are you concerned that the recent wave of legal challenges against the SEC’s rulemaking agenda is a threat to its reputation as a well-regarded independent regulator. Uyeda: Yes, I am. There are significant effects to our rulemakings, and I worry because of the rapid pace of rulemaking. We have not fully been able to consider all of those effects, especially when they are negative on small businesses.
Houchin (R-IN-09): Can you share your concerns with how the SEC and the Chair have continued to dance around the classification of ether? Peirce: I think this is the problem with our approach to crypto tokens. We leave people to read the tea leaves of our enforcement actions. We are spending so much on enforcement in crypto that we could be saving by just writing rules and then enforcing them against the bad actors or utilizing that for innovation in the market; Gensler: We are actually just enforcing the laws that are on the books, and as Commissioner Lizárraga said, protecting the public.