On September 27, the House Financial Services Committee held a hearing entitled “Oversight of the Securities and Exchange Commission.” The sole witness in the hearing was Securities and Exchange Commission (SEC) Chairman Gary Gensler.
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.
- Chairman Gensler was pressed by Committee members on several issues including the SEC’s treatment of digital assets, the SEC’s climate-risk disclosure rule, the significance of its four equity market structure rule proposals, and the timeliness of the SEC’s responses to Congressional inquiries.
- Gensler said that the SEC factors in any finalized rule to the economic analysis of any other related rules. However, Gensler said he would not allow the public to provide feedback on the SEC’s updated economic analysis of the climate-disclosure proposal before finalizing it.
- Gensler reiterated his belief that the cryptocurrency space is rife with fraud and abuse, and he said the Commission is considering recent court decisions and how they will apply to Bitcoin exchange traded products.
SUMMARY
Opening Statements and Testimony
Committee Chairman Patrick McHenry (R-NC)
Last time Chairman Gensler was before the Committee, I voiced concerns over your reckless approach to rulemaking, lack of capital formation agenda, and your attack on the digital asset industry. Those are the same issues on the docket today, and you have done nothing to remedy these concerns. Your approach to rulemaking jeopardizes our financial markets and puts investors at risk. There is a critical need for more comprehensive economic analysis for the rules you have proposed. There are valid, bipartisan, bicameral concerns over your equity market structure proposals. There is not a single initiative aimed at improving access to capital or increasing competitiveness. Your efforts to choke off the digital asset ecosystem has caused real harm to markets and investors. Your unresponsiveness to Congressional oversight and information requests is completely unacceptable.
Committee Ranking Member Maxine Waters (D-CA)
I am furious with the MAGA Republicans who have taken over the House of Representatives to force us into a completely unnecessary government shutdown which will cripple the SEC’s ability to stop fraud, help businesses make money, or finalize rules that are critical to investors. The SEC is doing exactly the job that the American people want, and I am glad that the SEC is providing investors with the information they need on climate risks. I am also happy with the work you are doing to reform stock markets to address the issues that we saw in the GameStop crisis. I am also glad that you are finally bringing transparency to private equity funds and their activities.
Gary Gensler, Chairman, SEC
Though we are blessed with the largest, most sophisticated, and most innovative capital markets in the world, even a gold medalist must keep training. Technology, markets, and business models continue to change dramatically. We now live in the age of electronic trading and generative AI. We’ve had dramatic growth in the scale, size, and interconnectedness of our capital markets, with individual investors participating more than ever before. Further, there are other fast-growing economies that, if they can, may seek to supplant us. I am grateful to work alongside this remarkable staff and my fellow Commissioners to promote the efficiency, integrity, and resiliency of the markets.
Discussion
Digital Assets
McHenry (R-NC): Why do you believe bitcoin is not a security? Do you think legislation is necessary to protect consumers in the world of digital assets? Gensler: Bitcoin does not meet the Howey Test. There are parts of the crypto ecosystem that are not securities, and while the CFTC has some anti-fraud authorities, they do not have total authority to write rules around the crypto ecosystem.
Waters (D-CA): Can you describe the actions the SEC has taken to address fraud and manipulation in the digital asset space? Gensler: We have finalized rules addressing broker-dealers in crypto, and we also addressed questions that came up about crypto exchanges and custody of crypto. We have brought numerous cases against these schemes to protect American consumers.
Sherman (D-CA): Is the SEC’s custody rule structured around intangible assets such as crypto? Should these rules be different than the rules for tangible assets such as real estate? Gensler: We address the custody of all customer assets, as Congress has authorized us to do.
Emmer (R-MN): Do you believe the vast majority of digital assets meet the Howey Test and are therefore securities? Gensler: I do not prejudge any single token of them. Given that most crypto tokens are subject to the securities laws, it follows that most crypto intermediaries have to comply with securities laws as well.
Gottheimer (D-NJ): Why has a rulemaking process for digital assets not begun? Gensler: We already have rules and laws that apply to crypto security tokens. Crypto exchanges are co-mingling, co-bundling, and trading against the public.
Gottheimer (D-NJ): What is the update on the status of the memorandum of understanding that you were working on with the CFTC to address gaps in the digital asset space? Gensler: I was hopeful we would do something more concrete there, but we work on a case-by-case basis with the CFTC.
Torres (D-NY): Do you agree with the statement that no Supreme Court has ever found that a scheme that does not involve a contract could qualify as an investment contract? Gensler: If the investing public is anticipating profits based upon the efforts of others and they are exchanging funds, it is considered an investment contract.
Davidson (R-OH): In looking at the Bitcoin ETF, how will the SEC revise its approach in response to recent court rulings? Gensler: We are considering that at the Commission.
Davidson (R-OH): Will you put recent filings such as Blackrock’s approval for a Bitcoin spot ETF ahead of others? Gensler: We are still considering that court case and its application as to Bitcoin exchange traded products.
Rose (R-TN): Why have you settled on such a litigation strategy in the digital asset space instead of trying to regulate through rulemakings? Gensler: Because the field is so rife with fraud.
Nickel (D-NC): Does the SEC plan to approve the current spot Bitcoin ETF applications? Gensler: We are taking this under advisement, and staff will take it up as appropriate.
Lynch (D-NY): What are your views on the Ripple case? Gensler: Those filings speak for themselves, but we are considering our options moving forward.
Lynch (D-NY): Does the digital asset bill passed out of this Committee raise concerns in your mind? Gensler: It is common practice for crypto exchanges to co-mingle. If Congress did anything, it should be to reduce those conflicts.
Flood (R-NE): Prior to the issuance of SAB 121, did Financial Accounting Standards Board issue anything related to the custody of digital assets? Gensler: I am not sure. The custody rule at the SEC from 2009 already covers crypto funds and securities.
Flood (R-NE): Did the SEC staff confer with prudential regulators before issuing the digital assets staff accounting bulletin? Gensler: I do not recall that they did.
Custody Rule
Lucas (R-OK): Have you consulted with the CFTC on the implications of the custody rule? Gensler: The staff has consulted with fellow regulators at the CFTC and have taken their thoughts into account. The CFTC has some rules for safeguarding assets, but they are not the exact same as what we have proposed.
Meuser (R-PA): Do you think greater regulatory and public collaboration would have enhanced the custody rule? Gensler: We have good on-going discussions with banks and investment advisors.
Steil (R-WI): Does the SEC conduct legal analysis of shareholder proposals? Gensler: I believe staff uses legal analysis as a component of their analysis, but I will get more details on the staff process to you.
Nunn (R-IA): Have the SEC and CFTC coordinated on the custody proposal and if so, when? Gensler: Usually, it is just staff to staff dialogue.
Climate-Risk Disclosures
Posey (R-FL): Which of your proposed rules is most vulnerable to be impacted by questions addressed in West Virginia V. EPA ruling? Gensler: We are familiar with that case, and we take a very close look at rulings like you mentioned to ensure we stay within our authorities.
Cleaver (D-MI): Is there any company that would be immune to climate risk? Gensler: We are not a climate regulator. This is a matter of investors making informed investment decisions. In comments, we have hear investors says they would benefit from consistency and comparability of climate-risk disclosures.
Williams (D-GA): What cost would the climate-risk disclosure have on businesses? Gensler: Our remit is just about public companies, not about small companies. We have received many comments with concerns about cost and we are taking those into consideration.
Casten (D-IL): Can you speak to the recent climate disclosure bills in California? Are you still on pace to release the climate disclosure rule in October? Gensler: If companies have to report to California, that may change the baseline as they will have already been required to report disclosures.
Davidson (R-OH): Are you aware of the West Virginia V. EPA court decision and its major questions doctrine? Gensler: Yes, I am aware, and I consider it to be the law of the land.
Vargas (D-CA): How important is the climate-risk disclosure act? Gensler: Many companies already report on these issues and investors are asking for this information.
Lawler (R-NY): Will you commit to allowing the public to provide feedback on the SEC’s updated economic analysis of the climate-disclosure proposal before finalizing it? Gensler: The answer is no.
Meuser (R-PA): What are your thoughts on Scope III? Gensler: Though many companies know their own greenhouse gas emissions, they don’t necessarily know their entire supply chain, and fewer public companies are currently publishing that. Staff is looking very closely to ensure that we stay within our authorities and it’s about the public companies.
Ogles (R-TN): How are you supposed to determine the compliance of ESG when it is so subjective? Gensler: The names rule is simply to ensure that funds’ name is consistent with what they advertise.
Equity Market Structure
Hill (R-AR): Would you wait for the Rule 605 data before you finish the other Equity Market proposals? Gensler: Equity rules have not been updated since 2005, and we are providing meaningful reforms. We are reviewing comments.
Timmons (R-SC): How concerned should we be about the potential for increased costs to investors with your equity market proposals? Gensler: Right now, our equity markets, thirty to fifty-percent are being traded in the dark markets. We are trying to bring more competition to that. Our economic analysis shows that each of these rules would benefit investors.
Scott (D-GA): Can you expand on how public disclosing proprietary positions in large security-based swaps would limit market participants’ ability to hedge? Gensler: Security-based swaps can be used to replicate positions taken in the stock and bond markets. Markets will benefit from increased transparency.
Broker-Dealer Rules
Houchin (R-IN): Given that the commission cannot point to a single broker-dealer systems disruption or any benefits to applying Reg SCI to broker dealers, how can you justify that proposal? Gensler: Some broker-dealers may have the size and scale that would disrupt the markets if taken down.
Consolidated Audit Trail
Hill (R-AR): Why is the blue sheet targeted exam process inadequate for you to do your job? Gensler: The CAT gives the SRO and the SEC a look at those orders and a chance to compare where they match up.
Foster (D-IL): Last time we spoke, we talked about the idea to simplify rule 605 by getting FINRA to write software that provides order execution reports based on the CAT. Have you thought about this idea? Gensler: It is possible that technologist could sort that through, but currently market participants can quantify their order quality.
Loudermilk (R-GA): Who are the three thousand individuals who would have access to CAT and how will they be vetted? Will the SEC use CAT to bring enforcement actions? Gensler: It is only allowed to be used at the SEC and at SROs. We have used CAT to bring enforcement actions and we plan to do so in the future.
Garbarino (R-NY): What is the SEC doing to control the cost of CAT for market participants? Gensler: I will respond in writing to this question.
Function of the SEC
Meeks (D-NY): Does the SEC consider how existing and draft rules would interact with one another when it comes to economic impact? Gensler: In each economic analysis, the SEC considers other rules that may have been adopted and adjusts the baseline accordingly.
Williams (D-GA): Has the SEC engaged in roundtable discussions to ensure they are receiving sufficient feedback on rulemakings? Gensler: We receive a lot of our feedback from comments.
Lawler (R-NY): How does the SEC take into account the aggregate economic impact of rulemakings? Gensler: We do our analysis rule by rule and the interaction as it relates to other rules. If we were to finalize a rule, then we take that into consideration.
Houchin (R-IN): It seems to me that the Commission has ignored bipartisan letters asking for change within the rulemakings. Does the Commission consider Congress’ suggestions when making rules? Gensler: Yes, we certainly consider Congressional opinions.