On September 12, the Senate Banking Committee held a hearing entitled “Oversight of the U.S. 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 contains several high-level takeaways from the hearing, followed by opening statements and Gensler testimony and a summary of the Q&A portion.
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.
- 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, and the significance of its four equity market structure rule proposals.
- Gensler said that the SEC is carefully considering public comments on how to tailor Scope III requirements in its climate-risk rule to avoid placing any burden on farmers or private companies.
- Gensler reiterated his belief that the cryptocurrency space is rife with fraud and abuse, and he said that the SEC requires additional resources to bring appropriate enforcement action in the space.
- Gensler said that the SEC would incorporate the impact of any equity market structure rule that it finalizes into the economic analysis of all of the subsequent rule proposals.
Opening Statements and Testimony
Chairman Sherrod Brown (D-OH)
Many on Wall Street have suggested that the SEC has been moving too fast on their rulemaking, but our markets are strong because we have effective regulators like the SEC who work to make sure we have transparent, fair, and honest markets. In addition, the SEC proposed a rule prohibiting conflicts of interest in the market for mortgage and asset-backed securities. The SEC is also working to advance market transparency by requiring companies to notify the market when they experience cyber-attacks. I am eager to see the SEC finalize its climate disclosure rule as it will provide much needed transparency to investors. Bad actors flock to crypto to facilitate scams and fraud, and I am glad the SEC is using its tools to put American savers and investors first.
Ranking Member Tim Scott (R-SC)
The SEC has not given its complete and timely attention to Congressional inquiries, which we need to ensure independent agencies remain transparent and accountable to the American people. This Committee has had to wait a whole year to speak with SEC even amid the FTX collapse. I have serious concerns with the way Chairman Gensler is leading the SEC. Under the Chairman’s leadership, the SEC has failed to implement pro-growth rules. Instead, they have churned out endless unneeded regulatory hurdles to capital formation and market access.
The compliance burdens of the proposed climate disclosure rule are expected to quadruple the cost of being a public company. The tax on private markets through the private funds rule will hurt small businesses and push small and diverse fund managers out of the market, ultimately limiting jobs and opportunity for many in the local economy. The complex proposed overhaul of equity and market operations will harm market access for retail investors and increase firms’ cost of capital, especially for small and medium sized businesses. The SEC defaults to regulation instead of innovation.
Gary Gensler, Chairman, SEC
The SEC does extraordinary work with limited resources in the face of significant growth of registrants. We are updating our rules to promote efficiency, integrity, and resiliency in the market. We do so with an eye towards investors and issuers alike to ensure that the markets work for them rather than the investors working for the market intermediaries. We are working to help lower costs, increase access, and promote financial stability and each of the proposals we’ve made in the last two years further that three-part mission. We provided the public ample time to comment, with an average of seventy days from the time we publish a proposal. In our twenty-two proposed rulemakings, nearly all of them have changed based on public feedback.
Discussion
Digital Assets
Brown (D-OH): If cryptocurrency markets lived up to the investor protections that we have in other markets, would that increase the investor safety? Gensler: Yes. Right now, there is significant non-compliance in crypto. The entire space is rife with abuse.
Cortez Masto (D-NV): Do you have the staff that you need, particularly for enforcement of cryptocurrency market fraud? Gensler: The agency is only three percent larger than we were seven years ago, so I would say no, we are not large enough. In terms of cryptocurrency, I have never seen a field so rife with misconduct.
Hagerty (R-TN): Can you explain what the SEC needs to see in a filing to approve a spot bitcoin ETF and what questions still need to be answered about the market infrastructure? Gensler: We are still reviewing the Greyscale decision, and I am looking forward to staff’s recommendations on the matter.
Sinema (D-AZ): How are you assessing the SEC’s litigation risk given the legal actions brought against the agency with respect to cryptocurrency? Gensler: We are dedicated and committed to taking actions only within our authority and how the courts interpret it.
Lummis (R-WY): You have said repeatedly that Staff Accounting Bulletin (SAB) 121 is for consumer protection but placing custody assets on the company’s balance sheet result in customer assets being seized by creditors in the event of a bankruptcy. Should the SEC withdraw SAB 121 to allow banks to provide custody to cryptocurrencies? Gensler: The Staff Accounting Bulletin was staff advice on how to do accounting in public companies and the staff found that you cannot easily segregate those crypto assets the way companies like Celsius was taking it on. In the bankruptcy finding, the judge said that the funds were not segregated and that the investors winded up in the bankruptcy. Bank regulators are free to address capital however they wish.
Climate-Risk Disclosures
Tester (D-MT): We have discussed previously that it is not the SEC’s intent to require producers, farmers, and ranchers to report on climate data for goods that they sell to publicly traded companies. Is this still true? What do you envision Scope III reporting requirements to look like? Gensler: That is still true. We are not a climate regulator, and we have looked very closely at comments from you and others to ensure we come up with workable solutions. We are still working to define the Scope III reporting process as we have received many comments that it is not appropriate to allow publicly traded companies to estimate their Scope III emissions.
Brown (D-OH): What steps is the SEC taking to ensure investors have the information they need to make informed decisions? Gensler: The material information related to climate risk and cyber risk is part of what investors need to make decisions. Many large companies already report climate-related risk because investors ask for that information. Our goal is to bring comparability and consistency to these disclosures across the markets. We are currently looking at how to rework the Scope III disclosure requirements in our proposal on the matter.
Smith (D-MN): Can you comment on why you think climate-risk disclosures are important and what urgency the SEC feels address this matter? Gensler: This proposal is really about bringing comparability and consistency to that which is already happening. We try not to do things against a clock, but rather when the staff is ready. The private funds rule took us about nineteen months, but I do not want to predict on this one has it was a very heavy comment file.
Daines (R-MT): What would give the SEC authority to circumvent Congress and enact rules about climate by executive fiat? Gensler: We have no climate agenda, but over eighty percent of companies are already reporting climate-related risk for investors to consider. It is about creating comparability on our end.
Equity Market Structure
Scott (R-SC): Do you think ninety days is a reasonable amount of time for an average investor or small business to digest a rulemaking that includes four equity market structure rulemakings including answering twelve-hundred questions? Gensler: We received many comments including your letter with Chairman Patrick McHenry (R-NC). We will review these comments and consider adjustments to ensure investors come first. We continue to get meetings and comments about the equity market structure proposal well after the ninety-day window.
Tillis (R-NC): Does the SEC’s analysis on each of the four proposed rules related to disclosure contemplate the interlocking nature of the rules? What analysis have you done on liquidity questions and the impact these proposals will have on investors? Gensler: If we were to finalize any of those rules, we would then incorporate that into an economic baseline which impact the economic analysis for all subsequent rulemakings. We do liquidity analysis on every proposal and carefully consider economic impacts of our rulemakings.
Van Hollen (D-MD): We have no visibility in private equity broadly. Will you speak on foreign sovereign wealth funds and their impact on visibility in private equity? Gensler: We have a recent adopted rule on private fund advisor transparency. We, as an agency, are neutral about which investors from which countries the investment advisor is advising.
Custody Rule
Rounds (R-SD): In relation to the Safeguarding Advisory Client Assets Rule, does the SEC have the authority to regulate custodial banks? Gensler: Yes, we put out this proposal based on new authority Congress gave us in 2010 for investment advisors and their custodial assets.
Tillis (R-NC): At what point of drafting the Safeguarding Advisory Client Assets Rule did the SEC confer with prudential regulators? Gensler: We have been working closely with prudential regulators for the past twelve years.