[House Hearing, 117 Congress]
[From the U.S. Government Publishing Office]
OVERSIGHT OF THE U.S. SECURITIES
AND EXCHANGE COMMISSION:
WALL STREET'S COP IS FINALLY
BACK ON THE BEAT
=======================================================================
VIRTUAL HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTEENTH CONGRESS
FIRST SESSION
__________
OCTOBER 5, 2021
__________
Printed for the use of the Committee on Financial Services
Serial No. 117-51
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
__________
U.S. GOVERNMENT PUBLISHING OFFICE
46-010 PDF WASHINGTON : 2022
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MAXINE WATERS, California, Chairwoman
CAROLYN B. MALONEY, New York PATRICK McHENRY, North Carolina,
NYDIA M. VELAZQUEZ, New York Ranking Member
BRAD SHERMAN, California FRANK D. LUCAS, Oklahoma
GREGORY W. MEEKS, New York BILL POSEY, Florida
DAVID SCOTT, Georgia BLAINE LUETKEMEYER, Missouri
AL GREEN, Texas BILL HUIZENGA, Michigan
EMANUEL CLEAVER, Missouri ANN WAGNER, Missouri
ED PERLMUTTER, Colorado ANDY BARR, Kentucky
JIM A. HIMES, Connecticut ROGER WILLIAMS, Texas
BILL FOSTER, Illinois FRENCH HILL, Arkansas
JOYCE BEATTY, Ohio TOM EMMER, Minnesota
JUAN VARGAS, California LEE M. ZELDIN, New York
JOSH GOTTHEIMER, New Jersey BARRY LOUDERMILK, Georgia
VICENTE GONZALEZ, Texas ALEXANDER X. MOONEY, West Virginia
AL LAWSON, Florida WARREN DAVIDSON, Ohio
MICHAEL SAN NICOLAS, Guam TED BUDD, North Carolina
CINDY AXNE, Iowa DAVID KUSTOFF, Tennessee
SEAN CASTEN, Illinois TREY HOLLINGSWORTH, Indiana
AYANNA PRESSLEY, Massachusetts ANTHONY GONZALEZ, Ohio
RITCHIE TORRES, New York JOHN ROSE, Tennessee
STEPHEN F. LYNCH, Massachusetts BRYAN STEIL, Wisconsin
ALMA ADAMS, North Carolina LANCE GOODEN, Texas
RASHIDA TLAIB, Michigan WILLIAM TIMMONS, South Carolina
MADELEINE DEAN, Pennsylvania VAN TAYLOR, Texas
ALEXANDRIA OCASIO-CORTEZ, New York PETE SESSIONS, Texas
JESUS ``CHUY'' GARCIA, Illinois
SYLVIA GARCIA, Texas
NIKEMA WILLIAMS, Georgia
JAKE AUCHINCLOSS, Massachusetts
Charla Ouertatani, Staff Director
C O N T E N T S
----------
Page
Hearing held on:
October 5, 2021.............................................. 1
Appendix:
October 5, 2021.............................................. 75
WITNESSES
Tuesday, October 5, 2021
Gensler, Hon. Gary, Chair, U.S. Securities and Exchange
Commission (SEC)............................................... 5
APPENDIX
Prepared statements:
Gensler, Hon. Gary........................................... 76
Additional Material Submitted for the Record
Gensler, Hon. Gary:
Written responses to questions for the record submitted by
Representative Budd........................................ 88
Written responses to questions for the record submitted by
Representative Davidson.................................... 90
Written responses to questions for the record submitted by
Representative Gonzalez.................................... 91
Written responses to questions for the record submitted by
Representative Hollingsworth............................... 92
Written responses to questions for the record submitted by
Representative Kustoff..................................... 96
Written responses to questions for the record submitted by
Representative Loudermilk.................................. 97
Written responses to questions for the record submitted by
Representative Lucas....................................... 99
Written responses to questions for the record submitted by
Representative Maloney..................................... 101
Written responses to questions for the record submitted by
Representative McHenry..................................... 102
Written responses to questions for the record submitted by
Representative Steil....................................... 117
Written responses to questions for the record submitted by
Representative Williams.................................... 119
Written responses to questions for the record submitted by
Representative Zeldin...................................... 120
OVERSIGHT OF THE U.S. SECURITIES
AND EXCHANGE COMMISSION:
WALL STREET'S COP IS FINALLY
BACK ON THE BEAT
----------
Tuesday, October 5, 2021
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 12:02 p.m., via
Webex, Hon. Maxine Waters [chairwoman of the committee]
presiding.
Members present: Representatives Waters, Maloney,
Velazquez, Sherman, Meeks, Scott, Green, Cleaver, Himes,
Foster, Vargas, Gottheimer, Gonzalez of Texas, Lawson, Axne,
Casten, Pressley, Torres, Adams, Tlaib, Dean, Ocasio-Cortez,
Garcia of Illinois, Garcia of Texas, Williams of Georgia,
Auchincloss; McHenry, Lucas, Posey, Luetkemeyer, Huizenga,
Wagner, Barr, Williams of Texas, Hill, Emmer, Zeldin,
Loudermilk, Mooney, Davidson, Budd, Kustoff, Gonzalez of Ohio,
Rose, Steil, Timmons, and Taylor.
Chairwoman Waters. The Financial Services Committee will
come to order. Without objection, the Chair is authorized to
declare a recess of the committee at any time.
As a reminder, I ask all Members to keep themselves muted
when they are not being recognized by the Chair. The staff has
been instructed not to mute Members, except when a Member is
not being recognized by the Chair and there is inadvertent
background noise.
Members are also reminded that they may only participate in
one remote proceeding at a time. If you are participating
today, please keep your camera on. And if you choose to attend
a different remote proceeding, please turn your camera off.
I now recognize myself for 4 minutes to give an opening
statement.
Good afternoon, and welcome back to the committee, Chair
Gensler. You have a lot to restore and rebuild.
During the Trump Administration, the Commission provided
minimal oversight and eliminated key protections for investors.
Trump's SEC impacted Regulation Best Interest that brokers
loved and investors hated. Trump's SEC approved proxy adviser
and proxy access rules that corporate executives loved and
shareholders roundly rejected to favor multi-billion-dollar
corporations. Trump's SEC did nothing to standardize reporting
of environmental, social, and governance (ESG)metrics.
Even though the financial sector's growth exploded, the
number of SEC staff under Trump was reduced by 5 percent, and
enforcement actions against Wall Street fell to historic lows.
And, more troubling, working families and retirees, whose
hard-earned savings helped fuel the capital markets, were
ignored.
Those are only a few examples, but the point is clear: Most
of the policy and administrative decisions the Commission made
under Trump unsurprisingly favored Wall Street, large
corporations, and their lobbyists.
The SEC, under your leadership, also finds itself in the
midst of a radically-changing marketplace. Millions of new and
often young investors are entering the markets, but the rules
of trading are stacked against them, providing larger,
established participants, like hedge funds and others,
exclusive access to information and trading venues not
available to everyone.
In addition, the incredible growth of unregistered and
volatile cryptocurrency assets, as well as the emergence of
cryptocurrency intermediaries, market exchanges, and
decentralized protocols, present your Agency with historic
challenges.
Earlier this year, when the GameStop trading event raised
significant questions about our markets, I convened a series of
hearings to understand exactly what happened.
We also passed several bills addressing some of our initial
findings, including my bill, H.R. 4618, the Short Sale
Transparency and Market Fairness Act, which provides our
markets with greater and more timely transparency regarding the
positions of Wall Street hedge funds and other large asset
managers.
We also marked up legislation related to gamification,
payment for order flow, and legislation prohibiting market
makers from trading ahead of their clients.
I look forward to hearing an update from you about what the
SEC is doing, and I would like to make it clear that our
investigation into the GameStop event is ongoing, and we will
issue findings when our review is complete.
As chairwoman, I expect the SEC will bolster the stability
of our markets. However, I am gravely concerned that the
largest risk to the capital markets and the economy in the
coming weeks is a train wreck we see coming: Republican Members
of Congress blocking the U.S. Treasury from paying its debts.
We are now less than 2 weeks away, and my Republican
colleagues are once again playing a dangerous game of chicken,
even though fully one-fourth of the increase in the debt comes
from Trump's tax scam, a $2-trillion unpaid tax cut for the
wealthiest Americans and billion-dollar Wall Street firms.
I hope that you, Chairman Gensler, will discuss from your
vantage point what the effect will be on America's investing
public and small businesses if Republicans' insistence on a
government default succeeds.
I thank you for appearing before us today.
I now recognize the ranking member of the committee, the
gentleman from North Carolina, Mr. McHenry, for 4 minutes.
Mr. McHenry. Thank you, Madam Chairwoman.
And, Chairman Gensler, thanks for being here. It is good to
see you again.
The last time you were here, the Senate had just confirmed
you, and it made sense that you were reluctant to speak about
the direction of the Commission's agenda. But now that you have
had some time to get your sea legs, I am looking forward to
your discussion about regulatory priorities.
You have not been shy in the press, so I hope we can have a
frank and transparent conversation here today.
On digital assets, you have made, in my view, a number of
concerning and contradictory public statements regarding crypto
assets and other innovative technology. When you were here in
May, you stated that there was a need for additional
legislation to appropriately regulate and define digital assets
and digital asset exchanges.
Then, just a few weeks ago, when you testified before the
Senate Banking Committee, you stated there was, ``a great
deal'' of clarity in the law. You implied that many digital
asset exchanges are underregistered security exchanges and even
threatened one digital asset exchange by name.
So, which is it? Does the SEC want more legislative
authority, or is it about to unleash a regulatory tsunami under
existing laws?
To be frank, I have strong concerns about how you will
regulate in the digital asset space and whether the law is on
your side. I believe it is time for Congress to step up and
provide clear guidelines that will not allow an SEC Chair to
change the law by interview or statement or a statement posted
on the Commission's website.
That is why earlier today, I introduced the Clarity for
Digital Tokens Act of 2021. We need to nurture innovation and
technology in this country, not send it overseas. This bill,
which borrows from the great work of SEC Commissioner Hester
Peirce, helps bring legal certainty to digital asset projects
that we badly need regulatory clarity to launch.
Two other points before my time runs out. First, much of
your broader agenda appears to be no more investor-friendly
than the bad bills that the Majority in the House here continue
to push in this committee. There is a bipartisan concern that
you will use, ``investor protection,'' as a guise for limiting
everyday investor choice and run roughshod over appropriate
processes in implementing your regulatory agenda.
Along the same lines, following appropriate processes
doesn't seem to be your strong suit. Your move to politicize an
independent Accounting Oversight Board by terminating the Chair
has raised concerns about your commitment to transparency and
process.
Second, it is a point you and I have spoken about, but I
want to raise here. I have sent several letters that you have
received that, frankly, received less than a fulsome response.
That is not acceptable.
Members of this committee rightly have concerns and
questions about your Agency and what it is doing and why it has
undertaken certain actions. The SEC needs to respond in a
timely and substantive manner.
I hope that with more time on the job, this problem will
correct itself, and my expectation is that it will. Thank you
for making it a priority.
Thank you, Madam Chairwoman. I yield back.
Chairwoman Waters. Thank you very much.
I now recognize the gentleman from California, Mr. Sherman,
for 1 minute.
Mr. Sherman. Welcome back, Chairman Gensler.
Your Agency oversees $100 trillion of trades each year, and
your budget request--and I know I echo the chairwoman on this--
is quite reasonable. It accounts for less than $1 for every
$46,000 of trade you oversee.
The Pandora Papers have shown the world that all too often,
billionaires are able to easily evade taxes, and dictators then
steal what tax money is collected. We need a financial system
that is less accommodating to the corrupt.
Frances Haugen showed us what is behind Facebook. She is an
SEC whistleblower. And I hope that you give her disclosures
full consideration, given the fact that she will probably face
lawsuits from Facebook.
You exercise tremendous power, but particularly over bond
rating agencies and the Financial Accounting Standards Board
(FASB), the two most powerful, almost completely unknown
agencies in our society. And investor protection is not a
guise, it is your guide, and I support [inaudible].
Chairwoman Waters. I now recognize the gentleman from
Michigan, Mr. Huizenga, for 1 minute.
Mr. Huizenga. Thank you, Madam Chairwoman.
And Mr. Gensler, congratulations on your new Twitter
account. It appears that you, like a lot of folks, including
me, were watching the Olympic Games this summer, because in one
of your tweets, you compared adding company public disclosure
requirements to the Olympics adding new sporting events,
responding to the desires of fans.
My problem with this analogy is, frankly, you seem to think
that the SEC's power and expertise in disclosure is as
unlimited as the International Olympic Committee's (IOC's)
power over the Games.
Well, I disagree. Just because the SEC generally does a
solid job regulating disclosure about financial statements
doesn't mean it is well-qualified to regulate around
environmental topics.
I have a different analogy for you. To me, the SEC
requiring disclosure on ESG metrics is like if we required the
gymnastics judges to judge the diving events--similar, but they
are not qualified.
I hope that you are going to be able to reconsider that. I
look forward to this process. And I do question the wisdom of
the direction that you are going on a few of these things.
I yield back the balance of my time.
Chairwoman Waters. Thank you very much.
I want to welcome today's distinguished witness, the
Honorable Gary Gensler, the Chair of the United States
Securities and Exchange Commission.
You should be able to see a timer on your screen that will
indicate how much time you have left, and a chime will go off
at the end of your time. I would ask you to be mindful of the
timer, and quickly wrap up your testimony if you hear the
chime.
And without objection, your written statement will be made
a part of the record.
Chair Gensler, you are now recognized for 5 minutes to
present your oral testimony.
STATEMENT OF THE HONORABLE GARY GENSLER, CHAIR, U.S. SECURITIES
AND EXCHANGE COMMISSION (SEC)
Mr. Gensler. Good afternoon, Chairwoman Waters, Ranking
Member McHenry, and members of the committee. It is good to be
back with you, and I look forward to the day when we can be
there in person in that wonderful hearing room.
I am honored to appear here today for the second time as
Chair of the Securities and Exchange Commission. It is
customary, I will note, that my views are my own. I am not
speaking on behalf of my fellow Commissioners or staff.
I have worked in and around markets my entire adult life. I
believe the U.S. capital markets are the best in the world, and
there are many reasons that we represent 38 percent of the
world's capital markets.
But we can't take our remarkable capital markets for
granted. New financial technologies continue to change the face
of finance for investors, and for businesses around our
country. Also, more retail investors than ever are accessing
our markets, and other countries are developing deeply
competitive capital markets as well.
Although I provide greater detail in my written testimony,
I would like to just flag three policy broad-brush areas.
The first is market structure. Our mission at the SEC is
about capital formation and facilitating capital formation on
one side, and investor protection on the other, but what is in
the middle, that third prong of our mission, is about fair,
orderly, efficient markets.
I think that we can drive more efficiencies in these
markets in the middle, and to the extent we can, and are able
to, that helps capital formation, and it helps investors.
I have asked staff to look at projects in a number of areas
in the Treasury markets, which have had some hiccups in
resiliency over the years, and in non-Treasury fixed-income
markets, where possibly we could drive more efficiency, equity
markets, and securities-based swaps and so forth.
In these critical markets, I think companies and investors
alike will benefit if we get greater competition, lower cost,
and bring transactions out of the dark.
The second is the rapid changes in technology. We are
living in transformational times, perhaps as transformational
as the internet itself. I know you might be thinking I am going
to say something about crypto--and I will--but I think the
transformational side is actually in data analytics.
Predictive data analytics, artificial intelligence, and
machine learning are really shaping a lot of parts of our
economy. And with these developments, how can we increase
access and choice, which is net positive, but also ensure that
we make sure we are still achieving our public policy goals of
investor protection and promoting capital formation and the
like and ensuring that we protect against conflicts of interest
or biases in the data or systemic risk.
Separately, as the ranking member said, and we have had
some good private conversations on this as well, I don't think
that we have enough investor protection yet in the crypto
finance, issuance, trading, or lending areas. I have asked the
SEC staff, working with fellow regulators at our other
Agencies, to see what we can do here.
The third issue is disclosures. Since the 1930s, we have
had a basic bargain: Investors get to choose what risk they
take as long as it is based upon full and fair disclosure of
the issuers.
Over the decades, we have updated what those disclosures
are, and I look forward to talking about this further with
Representative Huizenga. But today, investors are looking for
consistent, comparable, and decision-useful disclosures around
climate risk, human capital, and cybersecurity.
I have asked staff to serve up ideas that we would, if the
Commission supports those ideas, put out for public comment and
see what investors think, because it is all about investors at
the core of this.
I have also asked staff to develop proposals around
potential issues--as you know, Sarbanes-Oxley passed about 20
years ago, and there was a basic bargain there as well. To
issue to the public in the U.S., your auditor has to open up to
inspections by the Public Company Accounting Oversight Board
(PCAOB). And although 50 jurisdictions have allowed this,
currently China and Hong Kong do not.
The SEC, working with the Public Company Accounting
Oversight Board, has quickly put in place things to meet the
challenges that Congress asked us to work on to ensure that
this would happen.
Separately, I want to say that last month, we authorized
voluntary return to the office. We have worked remotely for
about 19 months now. But it speaks to the dedicated staff of
the SEC, and I can't compliment them enough.
The last thing I would say is, as Chairwoman Waters said,
we have shrunk about 4 or 5 percent in the last 4 or 5 years. I
would have hoped that we might have grown 4 or 5 percent in
this period of time. I know resources are tight, but it would
help us to do our mission.
I thank you, and I look forward to your questions.
[The prepared statement of Chairman Gensler can be found on
page 76 of the appendix.]
Chairwoman Waters. Thank you very much.
I now recognize myself for 5 minutes for questions.
Chair Gensler, as I mentioned in my opening statement, I am
deeply concerned about the recklessness of Senate Republicans
refusing to vote for any legislation that would allow the
Treasury to pay the debt those same Republicans already voted
to incur.
Last week, Treasury Secretary Janet Yellen said on several
occasions that failing to raise the debt ceiling would lead to,
``a catastrophe,'' and Fed Chair Powell said it was essential
for Congress to act quickly.
Chair Gensler, as a former Treasury Under Secretary and
Assistant Secretary focusing on financial markets, as well as a
former Chair of the Commodity Futures Trading Commission
(CFTC), and as the Chair of the SEC, you are uniquely
positioned to describe what will likely happen if Treasury is
blocked by Republicans from paying its bills.
Can you describe what you expect would happen in our
markets, both in the coming days and if Treasury does default?
In particular, I would like to know what would likely
happen to people's retirement investments and to America's
businesses trying to raise capital and create jobs.
Mr. Gensler. Madam Chairwoman, I think we would be in very
uncharted waters. The uncertainties abound around this.
At the base of our entire capital markets are Treasuries.
It is one of the reasons why we are working so hard to build
the resiliency there. But in an actual default, we would be in
a period of uncertainty. What would happen to money market
funds? What would happen to the banks that rely on that
marketplace? The mortgage market is priced off of the
marketplace, and the automobile loans that people take out on a
daily basis.
And those uncertainties would be very significant. I think
that, although we don't know for sure, we would have
significant volatility in the markets, and we would see some
breakages in the system. But I couldn't predict which firms and
the like.
We do know that there is such a base of Treasuries that
underpins our entire capital markets that if that were to go
into default, we would be in for some of the greatest
challenges we have seen in our financial sector, much greater,
probably, than what we have seen in the past.
Chairwoman Waters. Thank you.
As I mentioned, one-fourth of the increase in the debt is
directly attributable to the former President's tax scamz, when
he passed the tax cuts for the ultra wealthy and Wall Street
firms without offsetting it at all.
Simultaneously, the Trump Administration reduced the
staffing of the SEC by 5 percent, and did not provide funding
to cover the SEC's rising operating costs. This occurred as our
capital markets grew significantly, including the huge growth
of the crypto assets.
Chair Gensler, as you know, the Obama Administration sought
to double the budget of the SEC and the CFTC, but those plans
were thwarted by Trump.
Please describe how your current budget request, if passed
by Congress, would help the Agency to fulfill its indispensable
mission of protecting those whose savings and work fuel our
economy?
Mr. Gensler. I thank you for that.
At the core of what we are in this three-part mission--
helping companies, investors, and the markets themselves--we
are effectively a cop on the beat.
And we, right now this year, I think, have a boom in
initial public offerings. And the more resources we have, the
more ability we have to help the public and help those
companies that want to go public, ensuring that their filings
provide the disclosures to the public.
We help the public in multiple ways. And the markets, as
you mentioned, are larger now than 5 years ago. And this is not
just about the crypto markets; this is about the base of
capital formation for innovators, for the entrepreneurial
spirit of the country.
I really believe in the basic bargain in the last 90 years
that with our laws and the SEC, we help enhance economic
activity with a robust SEC.
Chairwoman Waters. Thank you very much.
I have always been concerned about what appears to be the
Republicans' actions to not adequately fund the SEC. And I know
that you are the cop on the beat, and we need you to be funded
in order to do your job. We are working as hard as we can to
give you that kind of support. And I thank you again.
It is now time for me to bring on the gentleman from North
Carolina, Mr. McHenry, who is the ranking member of the
committee.
You are now recognized for 5 minutes, Mr. McHenry.
Mr. McHenry. Thank you, Madam Chairwoman.
Chair Gensler, I am concerned that you are operating on the
edges of existing law. You stated in 2018, before this
committee that, ``Clear rules of the road will allow firms,
both incumbents and startups, to more fully explore investing
in blockchain technology or crypto assets.''
You also indicated in an interview following the GameStop
hearing that the SEC will be working with Congress to bring a
regime to crypto exchanges.
What has changed?
Mr. Gensler. Thank you, Representative McHenry.
I think that working with Congress would be a help. And as
we have talked about a number of times, I think that the SEC's
authorities in this space are clear.
But what we could work with Congress on is, along with our
sister agency or sibling agency, the Commodity Futures Trading
Commission, we both have market oversight. They have oversight
over derivatives. We have it over securities. They also have
enforcement authority over commodities.
And I think that coordination, and working not just with
this committee but with multiple committees of Congress, we
could address it.
I also think--
Mr. McHenry. In your view, there is a limitation, though,
around what the CFTC, your former job a few years ago, and the
SEC, what permit they have under law to regulate these regimes.
Is that what you are indicating?
Mr. Gensler. What I am indicating is I think that Congress
painted with a broad brush for the definition of security and
included 30 or 35 separate areas that are within the definition
of security to protect the public against fraud.
But they also wrote in other laws for the Commodity Futures
Trading Commission to have authorities. And I think that
coordination, in working with Congress, we can fill some gaps.
Mr. McHenry. Okay.
Mr. Gensler. We could also fill gaps around stablecoins and
the banking regulatory regime.
Mr. McHenry. Okay, filling those gaps. Along those lines, I
think it is important that we have some regime in place under
existing law, and I think we have to have clarity in the law
around what is a digital asset.
And I do think, as you noted back in 2018--you noted in
your testimony at the time that the SEC did not view Bitcoin
and Ether as securities. Is that still your view?
Mr. Gensler. I think you are referring to when I was at
MIT, testimony I gave in front of this committee in 2019, if I
remember, and I was speaking to what the SEC career staff had
said.
Mr. McHenry. But I am asking your view now. I understand
all that context. I have done the research, and in fact, I was
at that hearing. But is it your view now that Bitcoin and Ether
are not securities?
Mr. Gensler. No. I am not going to get into any one token.
But I think the securities laws are quite clear. If you are
raising money from somebody else, and the investing public
believes, or has a reasonable anticipation of profits based on
the efforts of others, that fits within the securities law.
Mr. McHenry. Okay. That is why today, along those same
lines, Chairman Gensler, I introduced the Clarity for Digital
Tokens Act with Representatives Davidson and Budd, based on
Commissioner Peirce's digital token safe harbor proposal.
I asked about this before. Have you had a chance to review
her proposal?
Mr. Gensler. Commissioner Peirce and I talk actively about
these matters, but I have not yet reviewed--I think you just
introduced your bill this morning, and I look forward to
looking closely at that.
Mr. McHenry. Yes, but the bill is based off of her
proposal. I was asking if you have reviewed her proposal.
Mr. Gensler. Commissioner Peirce and I have had a number of
conversations about her thoughts on that.
Mr. McHenry. Okay. So, you are not willing to answer that
question.
Mr. Gensler. But, no, she and I have talked about her
thoughts on this around a potential safe harbor.
Mr. McHenry. Okay. But again--
Mr. Gensler. I think that the challenge for the American
public is that if we don't oversee this and bring in investor
protection, people are going to get hurt.
Mr. McHenry. I understand. This is a horrible format for
cross-talk here. But what I am trying to get at here is a
broader-brush view. You have done a number of media interviews.
And, so far, we have seen some of those comments that you have
made have raised questions in the marketplace made things less
than clear.
And I would point to a couple of things. You have made
seemingly off-the-cuff remarks that moved markets, you
disregarded rulemaking by putting a statement out without due
process, and you have essentially run roughshod over American
investors, and that is before we even talk about summarily
firing the PCAOB members without cause.
My question is the general broad brush here. Is it your
intention to follow the Securities and Exchange Commission's
long-held practice of notice and comment on rulemaking and
procedures?
Mr. Gensler. I believe in the Administrative Procedure Act.
Chairwoman Waters. The gentleman's time has expired.
Mr. Gensler. I think we have benefited by getting the
public's input.
Mr. McHenry. Is it your intention to follow through with
that?
Chairwoman Waters. The gentleman's time has inspired.
Mr. McHenry. Is it your intention to follow the
Administrative Procedure Act?
Mr. Gensler. We follow it, and we put out a proposal last
week on fund disclosure, and we look forward to doing that on
many of the things on our unified agenda.
Chairwoman Waters. Thank you, Mr. Gensler.
The gentleman's time has since expired.
The gentlewoman from New York, Ms. Velazquez, who is also
the Chair of the House Committee on Small Business, is now
recognized for 5 minutes.
Ms. Velazquez. Thank you, Chairwoman Waters.
Chair Gensler, volatility surrounding the trading of
GameStop and other stocks earlier this year has renewed calls
for increased transparency and regulation of short selling.
Section 929A of the Dodd-Frank Act requires the SEC to
develop a rule to increase public reporting of short selling
activity, but more than 10 years later, the SEC has yet to
promulgate a rule.
Where does this rulemaking stand on your list of priorities
as Chairman? And when do you think the SEC will propose this
rule?
Mr. Gensler. I thank you for highlighting that,
Representative, and I have asked staff to propose it to our
five-member Commission. And yes, as we were just discussing, if
we vote on it, we put it out for notice and comment.
Around short-selling disclosure, this was a mandate
Congress laid out, I believe, in the seven or eight places that
we have unfulfilled mandates, whether it is on executive
compensation, short selling, stock loans, and some mandates on
securities-based swaps.
All of those are on our unified agenda. I would hope and
anticipate that, although we have an active agenda, we will put
this out for notice and comment sometime early next year, and
then hear what the public has to say on it.
Ms. Velazquez. Great. As you know, increasing the
transparency of short-selling activities is a very important
issue for me, as I have consistently seen this practice used
against retail investors and working families. We have waited
too long for this rulemaking, and I would really appreciate if
you could keep my staff updated as the SEC moves forward.
My office has also heard strong and consistent demand from
a wide group of market participants about the need for
mandatory climate risk disclosure rulemaking at the SEC. Has
the SEC heard a similar type of demand?
Mr. Gensler. We have. There are hundreds of companies. A
majority of the 500 biggest companies currently do voluntary
disclosures in this space, and trillions of dollars of assets
under management have asked for disclosure.
I think this is a place where there is a real role to help
bring consistency and comparability, some standardization that
would help both the companies and the investors.
And, again, we will put it out for notice and comment and
see what the public says on, what do investors really want when
they are making these decisions on climate risk, as you say,
but also on human capital, and we have a project on cyber risk
as well.
Ms. Velazquez. You have previously stated that the SEC will
propose a rule on climate risk disclosure by the end of the
year. Do you still feel that this is an appropriate timeframe?
Mr. Gensler. Yes. Whether it is towards the end of the year
or early next year, because these things--we want to finish up
our economic analysis, and take comments from each and every
one of our Commissioners. And, again, I don't want to prejudge
voting something out.
Deep respect, and I think that the Commission process is
good, but in the next handful of months.
Ms. Velazquez. Great, so we don't have to wait 10 more
years, like the other rule.
Chair Gensler, this committee passed my bill, the Greater
Accountability in Pay Act, which builds on Dodd-Frank's CEO pay
ratio disclosure requirement by requiring public companies to
disclose the ratio between the pay rate percentage of its
executives and its median employees over the previous year.
Can you explain how this bill will help increase the
accuracy of equity prices, allow investors to make more
informed decisions, and allow the SEC to provide better
oversight of our capital markets?
Mr. Gensler. Congresswoman, if I could go a little broader,
I think that investors benefit by understanding and having
transparency about executive compensation, and there are a
number of features included in your bill to do that.
We still have three important rules that Congress asked us
to do and to finish up on, and so we are moving forward on each
of those.
The first is called, ``clawbacks,'' a simple concept that
if executives got paid on financials that had to get revised,
then some of their pay would go back.
Second, there is something called, ``pay for performance,''
and we are going to try to--staff is working on that to propose
that out.
And third, last week we even had more disclosure with
regard to, ``say on pay,'' that funds would disclose their
votes.
But I think, all in all, it helps the efficiency of markets
when investors get to decide when they have that full and fair
disclosure on executive compensation.
Chairwoman Waters. Thank you very much. The gentlewoman's
time has expired.
Ms. Velazquez. Thank you.
Chairwoman Waters. The gentlewoman yields back.
Mrs. Wagner is now recognized for 5 minutes.
Mrs. Wagner. Thank you, Madam Chairwoman.
Chair Gensler, welcome back.
In much of your commentary on payment for order flow, you
suggested that investors may not be receiving best execution.
Can you provide us with more specificity on why it is you
believe the duty of best execution may have been violated by
retail brokers?
Mr. Gensler. Thank you for asking that.
There is the potential for the conflict of interest when my
order or anybody's order is not routed in competition with
other orders but is routed to a wholesaler or broker who is
purchasing that order flow.
So, when we back away from order-by-order competition, and
it may well be about algorithms or formulas between a broker
and a wholesaler without transparency, there may not be best
execution.
Mrs. Wagner. One leading brokerage firm found that last
year, they had billions of dollars of price improvement by
executing through wholesalers, with 90 percent of trades
finding price improvement.
This particular broker received payment for order flow, but
ultimately, the retail trader received a better price than they
could have received, say, via an exchange.
Isn't that a good thing, Chair Gensler?
Mr. Gensler. Price improvement is a good thing, but I think
the measuring rod of that price improvement is off of something
called the National Best Bid and Offer (NBBO), that does not
reflect the full market. Sixteen years ago, when these rules
were put in place, they may have been fit for 2005, but so much
has changed in those 16 years. I have really asked staff to
say, what can we do to update this for the 2020s?
And that National Best Bid and Offer has constraints in it.
A lot is not in it. It also has an increment that it can't be
narrower than penny size. There are a lot of reasons why this
may not be the most efficient method.
Mrs. Wagner. Chair Gensler, you received significant
attention recently when you were quoted as saying that a ban of
payment for order flow is, ``on the table.''
Can you explain what banning payment for order flow would
achieve? And if payment for order flow were banned, do you
anticipate that retail trading would remain commission-free?
Mr. Gensler. We are motivated by our three-part mission,
and the core in the middle is efficient, competitive markets.
So, I have asked staff, how can we help ensure, and even
enhance that efficiency?
Right now, as you mentioned zero commission, zero
commission does not mean it is free. It does have some cost
inside. Some brokers have payment for order flow, but I would
note that some do not and also offer zero-commission trading.
Mrs. Wagner. I would have to say pennies. I would certainly
hope that a ban of payment for order flow is not, ``on the
table.''
Chair Gensler, turning to Regulation Best Interest (Reg
BI), the SEC adopted Reg BI on June 5, 2019. It was the
culmination of a comprehensive, years-long effort to enhance
the standards of conduct for financial professionals that
advise retail investors.
The benefits of Reg BI to the capital markets are
abundantly clear, and there is little doubt that investors are
better off today than they were previously.
Chair Gensler, you have brought on staff with a clear
public record of opposing Reg BI. You can understand how that
would give the investing public the impression that the SEC,
under your leadership, is not committed to Reg BI.
And I would like to point out that during your confirmation
process, you committed to working with Commission staff to
ensure that Reg BI, ``lives up to its best-interests label.''
Do you still commit, sir, to fully supporting the continued
implementation of Reg BI?
Mr. Gensler. I think that is as true today as when I said
it, that to ensure that our regulations, Regulation Best
Interest and others, live up to what is written down on the
page and really is Regulation Best Interest, is that investors
are getting the best interest when a broker is making
recommendations.
Mrs. Wagner. Great. I am very relieved to hear that.
I have run out of time, so I will yield back. I have some
other questions, but I will submit them for the record.
Thank you, Madam Chairwoman.
Chairwoman Waters. Thank you very much.
The gentleman from California, Mr. Sherman, who is also the
Chair of our Subcommittee on Investor Protection,
Entrepreneurship, and Capital Markets, is now recognized for 5
minutes.
Mr. Sherman. Before I begin my 5 minutes, I have a
unanimous consent request. I request unanimous consent to enter
into the record letters from the Los Angeles County Employees
Retirement Association, the Healthy Markets Association,
Railpen, and the Certified Financial Planners Board of
Standards, which express support for certain discussion drafts
that are in front of us today, including those to improve the
Office of the Investor Advocate.
Chairwoman Waters. Without objection, it is so ordered.
Mr. Sherman. I will now begin my 5 minutes by focusing on
the PCAOB.
Chairman Gensler, thank you for mentioning that in your
opening statement. And thank you for your work in implementing
the Holding Foreign Companies Accountable Act, legislation that
Senator Kennedy and I led in Congress last year.
During your testimony to the Senate Banking Committee, you
expressed support for a revision to this law, which would
shrink the amount of time from 3 years to 2 years for U.S.-
listed foreign companies, basically Chinese companies, to
provide the PCAOB with the access it needs to ensure that the
company's audit was done accurately.
As you know, the primary purpose of the bill is to give the
PCAOB and the SEC the leverage needed to reach agreements with
market regulators in China. Do you believe that this 2-year
timeframe is consistent with the objective of ensuring that
companies listed on U.S. exchanges have accurate audits?
Mr. Gensler. It has been, I guess, 18 years now since this
basic bargain was put in place, and 50-plus jurisdictions have
allowed the Public Company Accounting Oversight Board access to
the work papers.
And access means unfettered access, that they can pick
which work papers to see. They see it. They are not redacted.
They can talk to the audit staff, and talk to them openly, and
assess whether the audit is up to the standards. And there has
been a challenge, that has not been the case with China, or
more recently, with Hong Kong.
I think that if Congress decided to shorten it from 3 years
to 2 years, I am supportive of that. That is up to Congress.
We are going to continue to work with the PCAOB to make
sure that everything is in place. Year one is 2021. If there is
any ambiguity about that, year 2, right now, would be 2022, and
so forth.
Mr. Sherman. Thank you. And having been an auditor myself,
I have prepared a lot of work papers, so I understand why you
need that or the PCAOB needs that unfettered access.
I have a couple of comments about points that have been
raised. The ranking member argues that crypto is somehow not an
investment or not subject to SEC oversight. I would say
cryptocurrency is not at this stage a currency. The vast
majority of people who are buying it are not buying it in order
to go out and buy a ham sandwich with it. They are buying it
because they think it will go up, and they can sell it for more
dollars than they invested in it. It is an investment like many
other investments, and investors need protection and deserve
protection.
As to commission-free trades, free is very expensive, if
free is illusory, and being told that their trades are free can
lead to high-frequency trading.
The investor deserves more than, ``best execution,''
because, ``best execution'' is a misnomer. They deserve not
only price improvement, but the most price improvement. And a
system which tells them it is free but doesn't give them the
most possible price improvement is certainly illusory.
We looked at Archegos, as many people focused on that as a
family office issue. I focused on it as a margin issue. Every
investor in the country is told, okay, you have so much in your
brokerage account, you can borrow up to half of what is in that
account. That is your margin limit. And that has been the law
since people were jumping out of the windows in the 1930s when
they saw their stocks go precipitously down.
But we found with Archegos that they figured out a way to
use total return swaps to give themselves 8 times rather than
put up only one-eigth or even one-tenth of the money.
Should we either allow ordinary investors to borrow 10
times the value of their portfolios, or should we prevent big
guys like Archegos from doing it, or should we have one rule
for small investors and another rule for those sophisticated
enough to engage in total return swaps?
Mr. Gensler. I think that the events of March in the family
office you mentioned raised a number of questions.
I think that we should have, in terms of your central
question about margins, some more consistency. We do have, with
Congress' authority, rules that are going into effect in
November.
The Commission, prior to my getting there, voted out that
securities-based swap dealers had to register as of November
1st. They have to report their trades as of November 8th. Some
of that will be reported publicly next February.
I have also asked staff to do more work, and recommend to
us, can we put out for public comment a rule around the
aggregate positions, a family office that you mentioned,
Archegos, their aggregate positions of total return swaps?
Chairwoman Waters. Thank you. The gentleman's time has
expired.
The gentleman from Oklahoma, Mr. Lucas, is now recognized
for 5 minutes.
Mr. Lucas. Thank you, Madam Chairwoman, for holding this
hearing.
Chairman Gensler, as always, it is good to be with you
again. Perhaps only a few of our colleagues remember the amount
of time when you were the CFTC Chairman, and I was the House
Agriculture Committee Chair, that we spent in quality hearings.
Of course, you will always note that I focus on things that
are important at home, and today I would like to put my
particular perspective on the upcoming climate risk disclosure
rulemaking that has generated a lot of interest here in
Oklahoma, since we are both producers of traditional and
renewable energy, and an agricultural area that consumes a
great deal of energy.
Mr. Chairman, publicly traded companies are at varying
stages of climate and ESG disclosure, and the related reporting
and climate modeling is still an evolving practice.
Are you concerned that the upcoming climate risk framework
could have an outsized burden on small to medium-sized
companies? And how might the SEC account for this?
Mr. Gensler. I am really looking forward, with the support
of my fellow Commissioners, to try to put something out for
public comment, and a question that you just raised, to include
questions like that to the public as to large issuers versus
small issuers, as you mentioned.
And also, I think implicit in what you are saying is some
reporting will be easier to do sooner.
I have asked staff to take a look at qualitative disclosure
about governance and strategy, but also quantitative disclosure
to make sure that the disclosures people are making,
particularly around greenhouse gas emissions, have consistency,
but also, how to potentially even phase in the implementation
amongst large and small issuers and also amongst the different
types of disclosures.
Mr. Lucas. Because many would argue, I think quite
correctly, that the small and medium-sized companies are the
real generators of opportunity, are the real generators of
growth. We don't want to harm their ability to compete with
their big brothers and sisters, so to speak.
That said, continuing to think about this issue, you said
your staff was considering quantitative factors, such as
metrics related to greenhouse gadgets emissions, climate
change, financial impacts, and advancements towards climate-
related goals.
You have also mentioned many times today about the
importance of staff, and we all know that they are critical to
whichever branch of the Federal Government you are in.
Could you describe the current depth of climate expertise
at the SEC? Are there currently climate environmental
scientists on staff? And is the Commission engaged with
agencies, such as NOAA, the EPA, and the Department of Energy,
regarding the climate risk rulemaking process?
Mr. Gensler. The expertise of the SEC is around disclosure
about ensuring that the public--looking at the disclosures that
are currently. And, again, hundreds of companies are making
voluntary disclosures now, trying to bring some consistency and
comparability to those disclosures.
To your second question, yes, we have been in conversations
with other important parts of the U.S. Government.
Mr. Lucas. It is absolutely important. And as much faith as
I have in the MBAs and the attorneys and the political science
people, it is important that these other scientific disciplines
be involved in this process, whether it is consulting with the
other entities in the Federal Government that have that
expertise or drawing on it from somewhere else.
This is too important just to create rules and regulations.
It has to be done, I think, Mr. Chairman, you and I both would
agree, in a very thoughtful fashion.
With that, Chairman Gensler, you have announced that the
SEC is considering a review of Treasury market structure. Could
you discuss what this review might entail, how you are
coordinating it with the Fed and the Treasury Department, and
how you might think about the costs and benefits of potential
changes?
Mr. Gensler. We have had a number of challenges in our U.S.
Treasury markets dating back to 2014, when there were problems
in the pricing in the market, but then in 2019 and 2020, where
literally our central bank, the Federal Reserve, was providing
liquidity to the market because there were challenges in the
financial resiliency.
Working closely with our colleagues at the Federal Reserve
and Treasury, and also the Commodity Futures Trading Commission
has a role here, what we are trying to think through is, how we
could build greater resiliency into the market?
With a $22-, to $23 trillion market, it is at the base of
everything else we do in the capital markets. And right now, if
I can use the term, we have kind of a multinodal system where
we have a clearinghouse, we deal with brokers, we have big
market makers, both principal trading firms and big banks. And
if any one of those got into challenges, as we saw last spring
and in the fall of 2019, our central bank tends to get pulled
into providing resiliency.
So, we are looking at, can we do this better around
potentially central clearing? Former SEC Chair Jay Clayton took
up, could we put some rules in place about the trading
platforms themselves and the like?
Chairwoman Waters. The gentleman from New York, Mr. Meeks,
who is also the Chair of the House Committee on Foreign
Affairs, is now recognized for 5 minutes.
Mr. Meeks. Thank you, Madam Chairwoman.
Chair Gensler, I first want to start out by saying that I
am extremely pleased to see that you are serving as the Chair
of our SEC. I appreciate that you and I have had an open
dialogue on issues that touch on both the House Financial
Services Committee, as well as the House Foreign Affairs
Committee, in my capacity as Chair there, including the costs
and the benefits of the widescale Chinese delistment of
American markets.
But I also want to commend you on moving the needle to
increase more diversity and transparency in corporate
boardrooms, and also overall promoting better diversity in
human capital practices in the industry as a whole.
The SEC's recent vote to approve new listing rules to
enhance corporate board diversity disclosures is a necessary
first step, not only because diversity of thought is a proven
positive factor for companies who succeed, but also because
investors are demanding that their boards be diverse.
As you know, my bill, the Improving Corporate Governance
Through Diversity Act, passed through the House recently, and I
am grateful that you are continuing these efforts.
The newly-approved rules, however, are just the beginning,
since that is specific to NASDAQ, and there are companies
listed on other exchanges that will not need to comply with
these rules.
My question to you, Mr. Chairman, is, can you please
elaborate on what other types of actions the SEC is preparing
to take with respect to promoting diversity specifically?
Mr. Gensler. Thank you, and it is good to see you. I think
we first worked together when I was a staffer to Paul Sarbanes
some 20 years ago.
I have asked staff to serve up to us two important
potential rulemakings in this area, one related to the
workforces of America in public companies. Human capital is
probably one of the most critical assets of a company, and
building upon what the Commission did last year to give more
specific disclosures about the workforce, part-time versus
full-time labor rates, and the like, but also about the
diversity of the workforce.
U.S. companies now disclose through the Department of Labor
through EEO-1 filings and the like around their diversity, and
I have asked the question, would it be helpful to investors to
understand that?
In addition, you raised the question about board diversity,
and I have asked staff for recommendations around the boards.
There are only 10 or 15 people usually on these boards, or 6 to
15, but it is the leadership. And what it is really about is
what investors want to know, and whether we should do a rule to
be considered by our Commission on board diversity as well.
Mr. Meeks. Thank you for that. I look forward to you
continuing to work on that.
You have also expressed serious concerns over the loopholes
and potential abuses that exist within the 10b5-1 plan
framework, which serves as an affirmative defense for insiders
so that they make trades according to specific plans without it
constituting insider trading.
But the existing framework allows for a lot of different
types of opportunistic trading, where they could have had
material nonpublic information. But because they had set up a
10b5-1 plan, it is not considered insider trading.
And we have seen that executives of large companies
canceled their plans or implemented plans and have the trade
executed a few days later, and they end up netting significant
amounts of money.
But the question we should ask is, why did they cancel
their plans or why did they implement a plan that allows them
to trade shortly after the plan was put in place? If it is
because they have some inside information, then we need to
address that loophole in the framework. Is there an obvious
need for the 10b5-1 framework to change?
Chair Gensler, can you please describe the types of
loopholes that exist in the 10b5-1 plan framework and what
Congress can do to assist the SEC in addressing these
loopholes?
Mr. Gensler. I do think that there are gaps in this, in 20
years of this so-called safe harbor affirmative defense for
insiders to sell their securities. Right now, they can have
multiple plans. They can, as you said, cancel them on a daily
basis, put up a new one, and the like.
One of the best practices that is out there, and there are
many best practices out there, is to have a cooling-off period,
and I think my predecessor wrote to Congress about this as
well.
I have asked staff for recommendations around whether we
should have a required cooling-off period, if you want to say
you have this affirmative defense, whether you can have just
one plan rather than multiple plans and the like.
So, I think there is work to be done here.
Chairwoman Waters. Thank you very much. The gentleman's
time has expired.
The gentleman from Florida, Mr. Posey, is now recognized
for 5 minutes.
Mr. Posey. Thank you, Chairwoman Waters. One of the charter
purposes of the SEC is to facilitate capital formation. Last
week, a member of the committee asked Secretary Yellen how the
Administration's proposals to increase capital gains taxes,
qualified dividends, and corporate tax rates would affect the
competitiveness of American companies. Given your
responsibility for capital formation and the research of the
SEC, my question is, how would those new taxes impact the
competitiveness of the United States to attract capital
investment in the world economy?
Mr. Gensler. Congressman Posey, I think that our remit is
about the capital markets, and if it is okay, I think I should
leave it to Congress and the other parts of the Executive
Branch to sort through taxes.
But, in terms of our markets, it is about transparency. It
is about disclosure. It is about protecting against fraud. And
it is facilitating these vibrant capital markets regardless.
Over the decades, Congress has decided on high capital gains
and low capital gains, but we sort of leave that to others and
then try to facilitate, through our rules, the most vibrant
capital markets for capital formations.
Mr. Posey. That is a good walk around the block, but one of
your charter purposes is to facilitate capital formation, and I
am just trying to find out if more taxes on corporate America
and working Americans is the right direction to go, from your
perspective?
Mr. Gensler. Again, I do appreciate the question, and if I
weren't in my current role, I might have a lively discussion as
a professor at MIT, but in the role that I have right now, it
is really to facilitate capital formation through the tools
that Congress has given the SEC, the tools of antifraud,
antimanipulation, and a focus on registering exchanges so that
there is really efficiency in the middle of the market. Those
are the important tools, whether Congress raises the tax rate
or lowers the tax rate.
Mr. Posey. Okay. And just an assumption, I am sure nobody
else in the world is thinking this right now, but the refusal
to say yes or no kind of indicates that the answer is probably
one you don't want to give, and that, in fact, the higher taxes
are going to actually hurt your ability to--
Mr. Gensler. I respect that. I just think there are things
that you want me to discuss--crypto, China disclosures, the
PCAOB, the structure of equity markets, and the structure of
Treasury markets--but I think you would want me to leave tax
policy to Congress and the Executive Branch.
Mr. Posey. Setting the policy is definitely the job of
Congress and the Executive Branch. I just think the average
person in the street would think that the Chairman of the SEC
would have an opinion about whether we should tax American
companies and American people and American families more, if
that helps you do your job or if it doesn't help you do your
job?
Mr. Gensler. What best helps do the job is discussions like
this, of course, and trying to get the right resources to the
SEC and then working with my fellow Commissioners to try to
enhance our capital markets, given the rapidly-changing
technology. I think tax rates, again, are the remit of Congress
and the Executive Branch.
Mr. Posey. I am not trying to beat you up, and I don't want
to beat a dead horse. We will just leave this subject for now.
Given the time you have been at the SEC, have you
identified any regulations or restrictions on capital markets
that you think could actually be relaxed? If so, what
restrictions could be relaxed?
Mr. Gensler. I think in each of these reviews, and
particularly as we review the Treasury market structure and the
equity market structure, what I have asked is, how can we, in
the 2020s, ensure that they are most resilient and efficient,
and I think that is really a critical thing that we can do, and
the efficiency in the capital markets might, as you said, be
turning a dial or changing some of our current rules.
I would also say, in the crypto space, when I have said
publicly that these platforms come in, talk to us, get
registered, these trading and lending platforms, it is highly
unlikely, with 50, 100, or sometimes thousands of tokens, that
they don't have securities, but if they come in and they say,
``You know, that transfer agent rule doesn't quite fit or this
custody rule doesn't quite fit for these new forms of capital
formation,'' we should get into those discussions and talk
about how we stay true to the mission that Congress wants us to
do, but if we need to adjust some of these sometimes very
technical rules that were written in a different environment,
we should see what we can adjust.
Chairwoman Waters. Thank you very much. The gentleman's
time has expired.
The gentleman from Georgia, Mr. Scott, who is also the
Chair of the House Agriculture Committee, is now recognized for
5 minutes.
Mr. Scott. Thank you.
Chairman Gensler, how are you? The first thing I want to
say, Chairman Gensler, is congratulations. As both you and I
are graduates of the Wharton School of Finance at the
University of Pennsylvania, in Philadelphia, where we received
our Master of Business Administration (MBA) degrees, we all are
very proud of you. And, plus, I think, you are the only one now
who has been both Chairman of the CFTC and Chairman of the SEC.
What an accomplishment.
I am so excited that one of the first things that you have
done at the SEC is to establish climate change as one of your
top priorities. And as Chairman of the House Agriculture
Committee, I make climate change a very important part. We just
had credit carbon hearings to get us started in that, but my
question is that you have released a newly-proposed
Environmental, Social, and Governance (ESG) regulation. Tell
us, how exposed are our financial and security systems to these
weather patterns and monetarily, investment, equipment, the
floods up North in New York, and the fires burning up half of
the West? This is serious. What is the economic and financial
impact in your arena in terms of securities?
Mr. Gensler. Thank you for asking that. I would note that I
am the second person to have this honor, and the first was Mary
Schapiro, who chaired both of these great Commissions. And the
reason I mention is that is she has also, subsequent to being
at the SEC, done a lot of work on climate risk disclosure. So,
we are trying to build upon the work of something that
investors have come to look to, the Task Force on Climate-
Related Financial Disclosures (TCFD), where Mary is now
working.
I also want to say that it is really up to investors.
Investors are looking for this disclosure because climate risk
can affect a company, and it can affect their physical risk if
a flood comes, hurricanes come, or other physical indicia of
climate risks hit a company. And then, there is also transition
risk. The companies may be adjusting their business models for
their own self-declared goals.
Many companies have said publicly that they are going to
have lower emissions or net-zero emissions at some future date,
but also jurisdictions have--what they might be doing, what
their jurisdictions might be doing, what their customers and
competitors might be doing could affect their transition paths
in the future. Investors want to know more.
Mr. Scott. Mr. Chairman, I want to get to this other
question, because it is so important, too, and much has been
made about GameStop and Reddit and Robinhood and all of that.
What are you doing to protect investors, and to protect our
security systems? And what can and must Congress do to stop
this, put punitive measures, making it a felony?
We have to get tough so that we can protect--our financial
system is the heart and soul, and within that, it is our
investment, our stock markets, that must be held away from this
mess. So, what can we do, what can Congress do to put some
strong punitive measures in to stop this fraudulent behavior
with our social media?
Mr. Gensler. The GameStop events raise numerous issues,
some of which are in the plumbing and the infrastructure of
clearinghouses, but you are at another level about whether
there were things that Congress could do to address the
challenges there. What we are doing at the SEC is three or four
different projects: first, the plumbing, which I talked about,
the clearing, trying to shorten the clearing cycles; second, we
put out for comment for the public to weigh in on use of
digital engagement practices; and--
Mr. Scott. I know my time is getting short here, but I do
want to say this, Chairman Gensler. I have asked my staff to
begin putting together a bill so that we can have strong
enforcement powers, put fines in, put jail sentences in, make
it tough, so we will not allow these social media platforms to
abuse the basic foundation of our great nation. Invest in our
stock exchange. You and I both studied that. We have to protect
our financial system. I would like to call upon you at some
point--
Chairwoman Waters. Thank you very much.
Mr. Scott. --to get further ideas.
Thank you, Madam Chairwoman.
Chairwoman Waters. The gentleman's time has expired.
The gentleman from Missouri, Mr. Luetkemeyer, is now
recognized for 5 minutes.
Mr. Luetkemeyer. Thank you, Madam Chairwoman.
And thank you, Chairman Gensler, for showing up today. I
appreciate that. I wish Secretary Yellen would adhere to her
constitutional and legal authority to actually show up at the
Small Business Committee. It would be nice if she would do
that. Maybe you could talk to her about that.
My question starts out with, there was an article in The
Wall Street Journal yesterday outlining how private companies
are urging the Financial Accounting Standards Board (FASB) to
create accounting standards related to cryptocurrency and ESG.
I know you are examining some of the rulemakings with regards
to subjects, and specifically through Current Expected Credit
Losses (CECL), standards are being set by FASB in which they
ignore industry participants, as well as the financial well-
being of the American consumer.
I am currently working on legislation to enhance the
transparency of the FASB standards-setting process, and so my
question is, do you think FASB is the appropriate entity to
determine how assets related to crypto and ESG are treated and
not regulators, who must follow the Administrative Procedure
Act and significant notice and comment?
Mr. Gensler. There are three parts to your question.
With regard to climate risk, with regard to other matters
on crypto, I think that we are going to put things out for
notice and comment. Disclosure mandates over the decades have
really been the remit of the Securities and Exchange Commission
where appropriate, and we enhance them based upon the process
of notice and comment, as you discussed. On crypto, as well, I
think that is not just the SEC, but also the CFTC and the bank
regulators. I think we have a lot of work to do and maybe even
as earlier discussions with other Members, Representative
McHenry, and with Congress as well.
I am not familiar with what FASB is doing specifically with
regard to crypto or climate risk, but if it relates to the
financial statements, the footnotes to the financial
statements, it may well be that they have a project on how, for
instance, crypto assets are reflected on the financials. I
would be glad to work with you and your staff to better
understand that.
Mr. Luetkemeyer. I appreciate that. While The Wall Street
Journal canned the article yesterday, it is something you and
your staff could review, and see if it is appropriate for you
to get involved. Along that line, you and I talked offline a
while ago with regards to the ESG situation. I have some broker
friends who are talking to me and telling me: Look, now there
is a bunch of companies that want to be able to be--for people
to invest in if they are going to be the green companies, and
so they fill out forms or they add onto their website nothing
more than they are now green or they support green activities
or they are doing this or that.
Are you going to set some standards so that these companies
that say that they are green companies, that people are
investing in because of that, are actually doing something
along that line? Because I think, to me, this is misleading the
investors. Retirement funds and certain investors want to
invest in green companies. And if they are just putting this on
their website saying, ``Hey, I am a green company,'' without
doing the things to qualify for that, I think they are
misleading the public. What is your concern about that?
Mr. Gensler. We have a project also about investment funds,
investment managers, if they name themselves something, whether
it is green, sustainable, climate-free, et cetera, what stands
behind that? I think that the markets would benefit, and it
sounds like we might agree that this would benefit if there is
rigor behind that, the same way as if you named yourself to
say, ``I am a high yield bond fund,'' that you are actually
buying high yield bonds underneath it, and I think that would
help.
When I walk into a grocery store and something says, ``fat-
free'' on it, I can look at a label and there is something
behind that, that is actually meaningful. On the company side,
we are looking at disclosures as well, and I would love to work
with you to understand if you think, on the company side, there
is something we could do as well.
Mr. Luetkemeyer. Thank you for that. The last time you were
in front of the committee, we discussed the SEC issuing a
rulemaking on guidance similar to the prudential regulators.
You said that you would review what the prudential regulators
have done and get back to me. Have you reviewed what the
prudential regulators have done with regard to guidance?
Mr. Gensler. I'm sorry. Guidance, I just want to make sure
on which of the topics. Are you still speaking about climate--
Mr. Luetkemeyer. Some regulators want to go out there and
use guidance instead of rules, and then they go out and enforce
guidance, which is not--basically, guidance, as you well know,
should be something more than clarification or to be an FAQ or
something that they can give some guidance on, not a rule on
which you can enforce the law.
Mr. Gensler. I have, as it relates to the SEC, done as we
had talked about in the past. I didn't know if you were asking
about guidance from bank regulators on other subjects, for
instance, around climate. But as it relates to the SEC, yes.
Mr. Luetkemeyer. Okay. Thank you very much. I see my time
has expired, Madam Chairwoman.
I yield back.
Chairwoman Waters. Thank you very much.
The gentleman from Missouri, Mr. Cleaver, who is also the
Chair of our Subcommittee on Housing, Community Development,
and Insurance, is now recognized for 5 minutes. Mr. Cleaver?
Mr. Cleaver is not on the platform.
Next, we will have Mr. Green. Is Mr. Green on the platform?
No?
Then, we will move to the gentleman from Florida, Mr.
Lawson. You are now recognized for 5 minutes.
Mr. Lawson. Thank you, Madam Chairwoman. And thank you for
this hearing. This is a very good hearing.
Chairman Gensler, the committee has held three hearings on
GameStop, and you have testified on this issue surrounding
January the 28th. In each of those hearings, the payment of
order flow has been raised as a topic. You have stated that the
SEC is looking into the order flow and will make a
determination on how to further regulate the product.
Do you agree that the commissions of free trading have,
indeed, increased market participation among minorities and
women? I am particularly concerned about the impact on zero-
commission trades and whether those will be valuable in the
absence of the payment for order flow? How will you ensure that
any changes made by the SEC do not create additional barriers
of entry for those in new market participation?
Mr. Gensler. I think you raise an important point. The
projects that we work on are trying to drive towards lower
cost, greater efficiency, and greater competition in our
markets, the stock market, in this case. And payment for order
flow has been used by some brokerage firms, not all, but some
brokerage firms, and they say this helps them provide a zero
commission. There are other brokerage firms that have zero
commission and don't use payment for order flow. Our focus will
be on the overall market structure and, as you say, access to
the capital markets. We have growing retail participation in
the markets. That is good. Investing tends to be good, over
time, but active trading on a daily basis often lowers returns,
and some of these are also facilitating and even promoting that
with the way they use behavioral prompts and the like.
Mr. Lawson. Okay. Thank you very much.
As you know, under your predecessor, the SEC approved
changes through the exempt offering private security framework
that would increase the limit for how much an issuer can raise
in a single offering, establish new safe harbors for
integration, and ease some restrictions on communication
between issuer and investors. Today, two-thirds of capital
raised in the United States is done through the exempt
offering. Could you elaborate on that please, sir?
Mr. Gensler. You are absolutely right that over the
decades, the SEC has facilitated through various exemptions,
which are called exempt offerings, capital raising, both in the
public market and in the private markets. And we have both that
are facilitating capital formation, and I think what is
important is to ensure that investors get full and fair
disclosure in our public markets. That has been our basic
bargain, but even in the private markets, there are pension
funds that stand behind it, and working families and retirees
who stand behind it that ensure that there is an appropriate
set of regimes that help them as well.
Mr. Lawson. Okay. Thank you. Let's see if I can get this
other one in. Until recently, most broker-dealers that serve
retail investment are not transacting cryptocurrency. In fact,
they wanted nothing to do with it for a host of reasons.
However, over the last year or two, this has changed
drastically. In some cases, the crypto investment are traded on
the same platform as securities. They are almost tradeable in
the sense that an investor can buy one and sell the other, and
yet the crypto market is underregulated. Can you comment on
that?
Mr. Gensler. I think you are right. And I think, if we
don't get these exchanges, these lending platforms inside of
the public policy framework, a lot of people are going to be
hurt. It is a highly speculative idea that a token that may not
have any ownership, they are all structured differently, and
its trading in the marketplace on the efforts of others, the
potential that in the future it might be worth something
because others will pay for it, is highly speculative, and it
is not inside of our--they are not registering yet, and we are
going to use our authorities. I think it is clear that many of
these projects are within the securities laws, and we are going
to use our authorities and try to get more of these projects
and companies to register and be within the investor protection
framework.
Mr. Lawson. Thank you, Madam Chairwoman.
I yield back.
Chairwoman Waters. Thank you.
The gentleman from Michigan, Mr. Huizenga, is now
recognized for 5 minutes.
Mr. Huizenga. Thank you, Madam Chairwoman.
First, I want to associate myself with the comments from
Mr. Lawson about his concerns about access for trades. Free
stock trades is something that is apparently an anathema to
some, and it may go the way of the free checking account if we
are not careful with the Dodd-Frank Act Dodo Bird being
released here. I do also need to comment: It might be Tuesday,
but it is wacky Wednesday here on the Financial Services
Committee, where stock trades aren't free, but spending
trillions of dollars has no cost and is free, yet allowing
taxpayers to keep their own money is a, ``cost to government.''
So, it is an upside-down world for many Americans who are
looking in.
Mr. Gensler, I want to talk about the PCAOB. You have heard
a lot about ESG. We can have that conversation later. When the
creation of the PCAOB happened, the word, ``independent,''
appeared in the statute 10 times. I am concerned about your
unceremonious dismissal of Mr. Duhnke, and then soliciting
nominations for all five board positions. Obviously, that
prompted a couple of other Commissioners to resign, with doubts
about the independence of this. To date, you haven't provided a
satisfactory explanation for removing Mr. Duhnke or your
overhaul of the board, and, frankly, our investigation hasn't
turned up any good reason for those actions. All of this, I
believe, creates the appearance that you fired Mr. Duhnke to
appease partisan groups on the left and people like Senators
Warren and Sanders.
So, Mr. Gensler, is the PCAOB truly independent and does
it, frankly, need to be?
Mr. Gensler. Thank you for the question.
And I think the Supreme Court actually addressed this in a
case about 11 years ago, on free enterprise, and my
predecessor, Chair Clayton, used those authorities; the Supreme
Court said that the five member Commission of the SEC has
reporting to it this PCAOB. We review its roles. We review its
standards. And, yes, as Chair Clayton did, we can remove the
board.
Mr. Huizenga. And the ranking member is right. This is why
this format is terrible. We can't get our questions answered.
How does Mr. Duhnke's successor make decisions without thinking
that the SEC Chair is looking over their shoulder?
Mr. Gensler. In fact, I think that is what Congress put in
place, that all of the standards and rules are reviewed by the
SEC. I think, actually, that is what the statute says, that we
are supposed to do that.
Mr. Huizenga. That is the structure. Okay. As long as we
have that established, that is understood. So, here is what I
would like to know. If the Commission has the review of the
SEC, can you confirm that either your office or the Office of
the Chief Accountant at the SEC has reviewed press releases or
other materials from the PCAOB or its members before those
materials have been made public?
Mr. Gensler. I would be glad to chat with your staff to
understand the question better. I don't think it is done press
release by press release, but there are rules. For instance,
when the Holding Foreign Companies Accountable Act came up to
us, we put it out for notice and comment. We will vote on that
in about a month or a month-and-a-half's time. I have a process
around these.
Mr. Huizenga. Have you systematically required the PCAOB to
run things through your office before they are cleared?
Mr. Gensler. Again, as it relates to the rulemaking and the
standards--
Mr. Huizenga. No.
Mr. Gensler. --there is a process.
Mr. Huizenga. This is why it is important for us that the
material that has been requested by the ranking member has been
ignored. At this point, I would actually like to call on the
Chair to join with that so that we can get all of this
information. So, we will follow up on that.
Along those lines, I have actually dropped a bill today
that is called the Streamlining Public Company Accounting
Oversight Act. It will get rid of the PCAOB, and fold it into
the SEC. I would like your review of that. I don't expect your
reaction right now. I think that might get at what you are
talking about, so we can just be honest with everybody that it
is a political appointment and a political organization.
Quickly, is Facebook a utility? Should it be treated as a
utility?
Mr. Gensler. I think you are talking about a social media
company and all social media companies, as private companies,
that would be up to Congress to address--
Mr. Huizenga. No. The definition of what a public utility
is, it clearly--because they are publicly traded companies as
well. There are certain criteria which makes publicly held
companies utilities. I want to know whether or not you think
Facebook is a utility?
Chairwoman Waters. The gentleman's time has expired.
The gentleman from Illinois, Mr. Casten, who is also the
Vice Chair of our Subcommittee on Investor Protection,
Entrepreneurship, and Capital Markets, is now recognized for 5
minutes.
Mr. Casten. Thank you, Chairwoman Waters.
Chairman Gensler, it is lovely to see you again. You and I
have spent a lot of time talking about gamification, and it
certainly seems to be in the news a bit today, and particularly
in the ways that social media uses psychological triggers to
drive some fairly self-destructive behaviors. There was the
comment that Ms. Haugen made on, ``60 Minutes,'' earlier this
week, ``If you make the algorithms safer, people will spend
less time on it.''
And at least for me, that sort of felt like a gut punch in
our Robinhood hearings, because what the algorithm is to
Facebook is what gamification is to Robinhood, and, of course,
the pernicious incentives created by ad revenue for Facebook
are quite similar to the pernicious incentives created by
payment for order flow to Robinhood especially, when they are
earning a percent of the spread in the PFOF, not just a flat
fee.
My question for you is, in your digital engagement
practices work you are doing, I am hoping you can confirm for
me that those issues, and specifically the conflicts between
looking out for investors' best interests in the ways that
those companies earn money, that that will be a subject of your
investigation. And if you can confirm that, that is great. I
can go on to the next question. And, if not, I would love to
hear, why not?
Mr. Gensler. Yes. I think it is central. I think it is the
issue of our day that digital analytics are being used to not
only optimize for our returns but may be used to optimize for
the company, the platform's revenues. And, if they are being
done by a robo adviser, an investment adviser, or brokerage,
then that creates a conflict. It might create a more fun
environment for us. That is okay. But is it also creating more
revenues, and what is that conflict there, and how do we
protect investors?
Mr. Casten. Okay. I am delighted to hear that, and we can
follow up offline.
I want to shift to climate. Some of my colleagues across
the aisle seem to think that the primary question in our
climate is whether disclosure might increase the compliance
cost for small mom-and-pop businesses. I would suggest that
that is not even in the top 100 issues that are caused by
climate [inaudible].
Putting that aside, the bill that I introduced that we, of
course, passed on the House Floor to direct the GAO--not your
Agency but very similar to the work you are doing on climate
risk disclosure--was really driven by three issues. Number one,
there is massive investor demand. There are going to be almost
a third of assets under management in ESG funds, so let's give
investors what they want as long as we are espousing the
supporting interest of investors.
Number two, investor protection. I would echo what Mr.
Luetkemeyer said, that as long as a company can stand up and
say, ``I will be net-zero by 2035,'' and their auditor has no
way of knowing what that means, that we have a gap and I am
delighted to see you starting to put some boundaries around
what those rules are.
Number three, I am not sure if this is subject to your
jurisdiction or others, but it is a broader question of
financial market stability. If we don't have the data from the
affected firms, then we don't know where the risks are parked
in our financial structures, where these cash flows are going
to happen from--we are looking at huge cash flows from
transition risks, from physical risks, and we have a separate
bill that we have been working on with Senator Schatz, which is
really more directed at Treasury to figure out how to sort of
calculate that and monetize it and put barriers around those
financial risks.
But one of the pieces that, as we have dug into this is, I
haven't been able to get a good answer to is--figuring out
where the monetary flows are going to be is the easy question.
Figuring out the capital structure of those flows is really
hard. So, if I know that a certain company is going to see a
huge loss of value, but I don't know how much of their capital
structure is tied to senior debt, junior debt, and equity in
trying to figure out where that sits because even for public
companies, sometimes the precise rules of their credit
agreements are not always disclosed.
My question is, in your work on climate disclosure, are you
going to be requiring companies to provide details of their
capital structures in addition to their contribution or
exposure to climate change, or is that a question better asked
to other financial agencies?
Mr. Gensler. Given that the clock is ticking, it might be
good to follow up, and we can chat offline after this hearing,
but our focus is really, what do investors demand and want to
make their investment decisions? So, for public companies, it
is around that and the climate risk, qualitative and
quantitative disclosures, but I would like to better understand
about the capital structure because companies already have to
disclose--public companies--a lot about their capital
structure, and it sounds like you have had some thoughts that
that is,--how shall I say, falling short in some way. I would
like to understand where that is falling short with investors
as, in essence, our clients are the investors.
Mr. Casten. I apologize for rambling on so long, but I am
out of time, and let's follow up offline.
Madam Chairwoman, before I yield back, I would like to
request unanimous consent to include in the hearing record the
following letters supporting many of today's discussion drafts
from Americans for Financial Reform, Public Citizen, and the
Ohio Public Employees Retirement System.
Chairwoman Waters. Without objection, it is so ordered.
Thank you.
Mr. Casten. Thank you.
And I yield back.
Chairwoman Waters. The gentleman from Kentucky, Mr. Barr,
is now recognized for 5 minutes.
Is Mr. Barr on the platform?
If Mr. Barr is not there, we will go to Mr. Williams.
The gentleman from Texas, Mr. Williams, is now recognized
for 5 minutes.
Mr. Williams of Texas. Thank you, Madam Chairwoman. And,
first of all, I want to say, just in full disclosure, that I
didn't go to Wharton, but I am a business guy, and I know that
when you increase taxes, that is bad, and when you cut taxes,
that is good. Maybe that will help some of your thought
process.
In any industry, allowing the private sector to innovate is
key to bringing new products and services to the marketplace.
This has been especially true in the capital market space with
the advent of zero-cost trading because of payment for order
flow. This partnership has allowed an entire generation of
investors to enter the marketplace for the first time and has
made zero-commission trading the new industry standard. And, in
the past, you have been recognized for how payment for order
flow has created a significantly lower-cost environment for
retail traders to place trades. There are studies which have
shown that this practice has resulted in a price improvement of
over $3.7 billion in the last year alone for retail investors.
Despite these benefits, the SEC is still contemplating a
complete ban on this practice and even expanding the definition
to include rebates being offered by the exchanges. This seems
like a drastic measure that is a response to misdiagnosing the
entire GameStop saga that happened earlier this year.
Mr. Chairman, it is good to see you, again, and as you look
at making changes to this practice, I urge you to also consider
the benefits that this has given all retail investors. My
question is, can you describe the overall growth trends of
retail investor participation since the advent of zero-
commission trading, and what you think would happen if payment
for order flow or these rebates were eliminated?
Mr. Gensler. I thank you for that. And retail investing has
increased. It has increased probably for multiple reasons, but
zero commission and, frankly, just even the ability to trade on
a mobile phone with ease has facilitated it as well, regardless
of the price. There are a number of brokers that offer zero
commission and do not do payment for order flow. What I have
asked staff is, these payment for order flows and, yes, rebates
on the platforms, the stock exchanges, and the like, is this
the best way to promote competition and efficiency? Is it the
best way to promote fast execution?
And you mentioned price improvement. Price improvement is
being measured against an old measuring stick, this thing
called National Best Bid and Offer, which doesn't include what
is in the dark markets, what is being internalized. It doesn't
even include everything on the New York Stock Exchange or on
NASDAQ. So, I have asked, how can we look at this, and look at
this for investors and companies raising money to be more
competitive, transparent, and efficient?
Mr. Williams of Texas. Okay. Thank you. We have seen a
troubling trend within the Democratic Party of calling on
financial regulators to enact their agenda when they realize
they will never be able to pass it in Congress. We have seen
lawmakers urge the banking regulators to force their regulated
entities to debank legal industries that have fallen out of
their political favor, such as oil and gas or the gun industry.
We are now seeing similar calls coming to your Agency, which is
in charge of reviewing the disclosures of over 7,000 publicly
traded companies and $100 trillion traded annually within our
capital markets, to expand your footprint into climate process.
So, by calling on a more stringent ESG regime, we are trying to
turn the many economists and financial experts at the SEC into
environmental scientists who will force companies to adhere to
a moving target of climate change goals coming from whichever
party controls the White House.
And, as we create more uncertainty surrounding what
information will be deemed material, I am really concerned that
everyday investors will ultimately be hurt by the activists who
might be the loudest in the room but are not personally
invested in some of these companies. Quickly, Chairman, how
will you ensure that investors are not going to be harmed
because of activists pushing their agenda into a space where
they do not care about any individual security?
Mr. Gensler. I would just say how I will be motivated and
what I will ask the staff. It is about investors, and it is
what Congress has asked us to do. Within our chalk lines,
disclosure, full and fair disclosure, is what Congress has
asked us to do. And what we have now in the 2020s is that
increasingly large numbers of investors want information about
climate risk. So, we can play a role at the SEC to bring some
consistency, comparability, and make sure those disclosures are
decision-useful as earlier discussions in this committee today
were, to make sure that folks aren't just saying they are green
or sustainable and they are not. I think it can help companies
and investors, and so, to me, it is staying within what
Congress has asked us to do.
Mr. Williams of Texas. I thank you for your testimony, and
I yield back.
Chairwoman Waters. Thank you.
The gentleman from Connecticut, Mr. Himes, who is also the
Chair of our Subcommittee on National Security, International
Development and Monetary Policy, is now recognized for 5
minutes.
Mr. Himes. Thank you, Madam Chairwoman.
And I have a question for Chairman Gensler, but I do want
to take just a second to try to--I am not a witness here, so I
can probably use more blunt language than the chairman can use.
My friends on the other side of the aisle are obsessed with
this preservation of payment for order flow. I can say it more
bluntly: Yes, when a broker uses payment for order flow, you do
see price improvement, but you see price improvement off of a
really lousy price, a terrible price.
And it is a truism in our capital markets that big
institutional players get much better pricing--by the way,
across-the-board on everything--than retail players do. And
there are entire segments of the industry that are designed to
sort of make profits out of that gap between the pricing that
retail investors get, retail investors meaning individuals and
others, and what institutional investors get. What I would
really love to see happen here, rather than seeing my friends
on the other side of the aisle stand up for the preservation of
a cynically-misleading concept like price improvement, to
actually dive into the question of why institutions get such
better pricing on almost every product than individuals do?
I just want to make that point, but what I want to do with
my remaining minutes--Chairman Gensler, it is great to see you
again. I am going to ask you to step a little bit outside of
your comfort zone, because you are more knowledgeable than
almost all of us, and probably all of the regulators on the
issue of cryptocurrency regulations, something of interest to
my subcommittee and Mr. Sherman's subcommittee.
I want to turn over my remaining--I can't see the clock
from here, but 3\1/2\ minutes or so, to ask you to give us some
guidance on the topic. And what I mean by that is, there is
legislation flowing around. Mr. Beyer has a piece of
legislation that sort of departs from the traditional Howey
construct of what would be a security. You have focused us on
exchanges. Congress is demonstrating its ability to do very
little these days. I am going to ask you to take the rest of my
time to give us some guidance on how we should prioritize the
legislation that we propose between exchanges, between the
arduous work of defining who should regulate what type of
cryptocurrency.
Let me just turn over the time to you so that you can give
us some guidance on how you think we might most fruitfully use
our time to try to address those areas in which there is likely
to be bad behavior?
Mr. Gensler. Thank you. At 2 minutes and 20 seconds, I
think that what we have here is a number of innovations--why I
am focused on the platforms, the trading platforms and the
lending platforms, is because investors basically are giving
ownership rights up. They transfer what is called a private key
to the platform in most of them, and the platforms take
custody, and those platforms then either trade on our behalf or
lend to us and the like.
So, I think such a tremendous amount of activity happens
there, and it is a place where we could get better investor
protection and customer protection alike, even in the
decentralized platforms, or so called DeFi platforms, there is
a centralized protocol. Although they don't take custody in the
same way, I think those are the places that we can get the
maximum amount of public policy, whether it is for anti-money
laundering, whether it is for tax compliance, or whether it is
for investor protection, which we so care about at the SEC. I
do think that these platforms would like to say: Oh, not us. We
are regulated by 49 States under money laundering.
But I think regulating these platforms like we regulate
MoneyGram--right there that sort of shines a spotlight that
that doesn't make much sense if we are talking about financial
stability and we are talking about investor protection and the
like.
Mr. Himes. Chairman, regulating exchanges and
clearinghouses is not a foreign concept to us. Would you have
us skew closely to analogies between the cryptocurrency
exchanges and currently-existing legacy exchanges, or do we
really need to craft a whole new structure? Coinbase is out
there with an idea of setting up yet another regulator. Should
we sort of use current existing regulations of exchanges as our
basis for--
Mr. Gensler. It will be for Congress to decide, and some
were quoting my testimony of prior years. Congress could
decide, but we have two really great market regulators, the SEC
and the CFTC, and I have been honored to Chair each of them,
and we have different authorities, derivatives, commodities,
and securities. I don't think that we need another regulator.
There are things that could be done to ensure the smoothness
between the two agencies, and CFTC Chair Rostin Behnam and I
have been talking about that, even if Congress doesn't act.
Chairwoman Waters. Thank you very much.
The gentleman from Kentucky, Mr. Barr, is now recognized
for 5 minutes.
Mr. Barr. Thank you, Madam Chairwoman.
And I appreciated your comments, Madam Chairwoman, earlier
in the hearing that you wanted to make sure we were adequately
funding the Securities and Exchange Commission because they
were the cop on the beat. I just want to note for the record
that the chairwoman is for funding the police, and I just
appreciate that.
Chairman Gensler, thank you for appearing before us, and I
appreciate our conversations about the importance of
materiality with respect to climate risk disclosure. Earlier
this year, you and the Commission issued a request for
information (RFI) on climate risk disclosure. A common theme
among respondents to that RFI was the importance of maintaining
this long-held materiality threshold.
I agree with these suggestions. Materiality must be
preserved, but I want to point out that materiality is
determined by investors' need for that information to make
informed capital allocation decisions. It is not in order to
satisfy the leadership of some large institutional investors
who are not necessarily aligned with retail investors in terms
of their demand to name and shame companies or bias the market
against certain politically-unfavored industries. That is the
difference between the standard of materiality versus what some
large institutional investors demand.
How do you plan to ensure that the SEC climate disclosure
rule maintains the threshold of materiality and does not burden
investors and issuers with an avalanche of extraneous
information?
Mr. Gensler. I share your view that it is about investor
demand, whether it is somebody buying 50 shares of stock or a
fractional share even or the large asset managers and pension
fund managers that are investors as well. The pension fund
managers, the asset managers are representing the rest of us,
representing the public, and I share your point there--
Mr. Barr. How well do you think they represent the rest of
us, and how well do you think that proxy process actually
accurately reflects the demands and the wishes and the desires
of those retail investors?
Mr. Gensler. Our job at the SEC is to make sure that it
represents it through what is called the duty of care, the duty
of loyalty, the two laws passed back in 1940 that are really
important, that investment managers are representing through
their fiduciary duties--
Mr. Barr. The reason why I asked that is because as we
discussed, and as I talked to the investment advisers and
broker-dealers in my district, ESG is a very low priority of
most retail investors. Retail investors care about returns, and
what troubles me--and I want to ask you if you agree with this,
the analysis that is public record--is that many of these ESG
funds have fees that are 43-percent higher than non-ESG funds
and cut into those retail investor returns. Does that trouble
you?
Mr. Gensler. I think that there are two parts to that. One
is that I have asked staff to make sure that fund managers that
are claiming to be green or sustainable or climate-free, what
stands behind that, that we should put out some rules on that.
And, if my fellow Commissioners agree, we will put that out for
public comment.
But a second thing is, how do we promote greater
competition to bring down some of those fees in the fund
management space? And I think that being clear on the naming
and what stands behind those names can also help in the
competition on the fees themselves.
Mr. Barr. As you move forward with your climate risk
disclosure rulemaking, I just want to stress the importance of
this materiality standard and what it actually is, because to
rely solely on the comments that come in and just ignore the
legal definition of materiality, I think would miss the mark,
because materiality is about the investors actual need for that
information to make informed capital allocation decisions; it
is not just about large institutional investors' desire to name
and shame politically-incorrect companies. I encourage the
Commission to look at materiality from the traditional,
conventional, legal standard of what materiality actually
means.
In terms of liability protections, I do worry about the
subjectivity of this, the concept of climate risk disclosures
relying on subjective and untested metrics. Do you have plans
to provide liability protections for issuers? What are your
plans to ensure that these disclosures are preserved
exclusively for informing investors and making the risk/reward
decisions and not hijacked by enterprising trial lawyers for
frivolous lawsuits?
Mr. Gensler. Like all of our disclosures, they are based
upon, as you say, what do investors want, what do they take
into consideration, or, as the Supreme Court has said, what
is--if I remember correctly, the substantial likelihood that a
reasonable investor finds significant in the mix of information
for an investment decision, and that investment decision is
really the important thing. And that is why we put it out for
notice and comment. Investors get to weigh in.
Chairwoman Waters. Thank you.
The gentlewoman from New York, Mrs. Maloney, who is also
the Chair of the House Committee on Oversight and Reform, is
now recognized for 5 minutes.
Mrs. Maloney. Okay. Thank you. I apologize. I had to Chair
an Oversight and Reform Committee hearing, and we just
finished.
Chairman Gensler, it is great to see you, again, and I want
to first ask you about cryptocurrency. You called it a,
``highly speculative asset class.'' Do you think--and it is
really a speculative investment--it should be treated like a
security, regulated like a security?
Mr. Gensler. Congresswoman, it is good to see you again.
And I think it is always based on the facts and circumstances,
but many of these projects--and there are 5,000 or 6,000 of
them--but many of them are basically saying to the investing
public, give us your money, and we have a small group of
entrepreneurs and computer scientists who are going to build
something. And, based upon that, there is a hope or an
anticipation of reward or profit in the future. Jay Clayton, my
predecessor at the SEC, said in congressional testimony that
most of these, or many of these fit that definition.
Mrs. Maloney. D you think it should be regulated like a
security?
Mr. Gensler. I think that I have asked projects to come in
and talk to us because I can't say that it all fits together
well, let's say, in our transfer agent rules and some of the
intricate underpinnings of our capital markets. But Congress
painted with a broad brush to protect the public against fraud,
and that is done through our securities laws when people are
raising money from the public.
Mrs. Maloney. Okay. Do you believe the SEC has all the
authority that it needs to regulate this cryptocurrency if you
should decide to do it or does Congress need to give you more
authority to be able to regulate the cryptocurrency?
Mr. Gensler. Thank you, and it is a question that the
ranking member asked in a little bit different way earlier,
which is, I think our statutes are clear, and Congress painted
with a broad brush what is a security, but I think working with
Congress, there are some gaps and there are some places that we
can work, whether it is our relationship with our sibling
agencies in the market regulatory space but also as it relates
to, for instance, what has come to be known as stable value
coins and how to think through that with the bank regulatory
regime as well.
Mrs. Maloney. I would be happy to work with you in this
area, and it is a growing prevalence in the district that I
represent. Can you give the committee an update on your current
banking with Regulation Best Interest, the so-called fiduciary
rule, and whether you intend to take further action to
strengthen this rulemaking?
Mr. Gensler. I think it is important that this rule live up
to its potential, that, ``best interest,'' really does mean
best interest. So, working with our examination staff, working
with our Division of Corporation Finance, working with--we just
hired an excellent person who is a senior adviser to me
directly, to ensure that the retail public gets the best, but I
am also asking the staff to consider, how do we ensure that the
brokers and the investment managers understand their duties
under that rule and to ensure that best interest means best
interest.
Mrs. Maloney. Okay. That sounds good. Lastly, this summer
the SEC approved NASDAQ's board diversity proposal, and they
have implemented it. And earlier, with the support of
Chairwoman Waters, Representative Gregory Meeks, and many
others, we passed a bill that would call upon the SEC to
disclose the diversity on boards, both for gender and for
minorities, and other information. And do you intend--you could
do a lot in that area just on your own. It has passed the
House; it is now in the Senate. Do you intend to do anything in
the board diversity area?
Mr. Gensler. Again, I say this probably more than you would
like to hear, but I have asked staff for recommendations, and
in two areas related to this, one with regard to the boards and
board diversities, what recommendations that we, as a
Commission, meeting investor demand could do, but also more
broadly, the workforce, the entire workforce of what we have
come to call human capital disclosure. That is not just about
part time versus full time and the pay rates and the like, but
it is also about the diversity of the workforce as a whole. And
on the earlier point, if I might just say, on regulation best
interest, if the rule doesn't work, ultimately, we are going to
look to make sure that brokers ensure that the investing public
truly gets best interest. I want to make sure that I put a real
comment on that.
Mrs. Maloney. Okay. Thank you so much for your time.
I yield back.
Chairwoman Waters. The gentlelady's time has expired.
The gentleman from Arkansas, Mr. Hill, is now recognized
for 5 minutes.
Mr. Hill. Thank you, Madam Chairwoman. I appreciate that,
and I appreciate the hearing. It has been a very educational
hearing.
I also appreciate Mr. Gensler's responses to our questions,
and following up on Mr. Barr and also Mr. Luetkemeyer on the
ESG industrial complex out there in the mutual fund asset
management industry on advertising, branding, and analysis for
ESG type funds, I think that is an important part of your
testimony. I am glad you referenced it, both in the stock
selection, and the asset allocation [inaudible].
Mr. Gensler. Did you go mute?
Ms. Garcia of Texas. Madam Chairwoman, we cannot hear him.
Mr. Hill. I don't know what happened there. It just kind of
reverted to mute. I apologize. It is unmuted.
Chairwoman Waters. We can hear you now.
Mr. Hill. Okay. I don't know what happened there. So, I
don't know what you heard and what you didn't hear.
Mr. Gensler. I heard you compliment the gaming--
Mr. Hill. Thank you for that. I appreciate Representatives
Luetkemeyer and Barr bringing that subject up, and I don't know
why it went on mute, as I said. So, I am glad that is being
looked at, because I think, truth in labeling there is
important under the securities laws, that we are not misleading
investors and we are providing a product that has real value
and not overcharging for a product. When I look at an ESG fund
that has a .9777 percent correlation with the S&P 500, it does
make me question whether or not it is an ESG fund.
Mr. Gensler, we talked when you were last before the
committee about materiality, and you recognized that, under
12b-20, all public issuers have a duty to disclose every
material aspect in their business on their financial
statements. Is that correct?
Mr. Gensler. I would have to look at those provisions, but
there is a requirement [audio malfunction].
Mr. Hill. Yes. You talked today about asking the staff to
look at both qualitative and quantitative issues, and on the
quantitative issues, have you personally read the [audio
malfunction].
Madam Chairwoman, this thing keeps muting without me
touching the computer, so my irritation level is rising, but
let me continue. That time, I noticed it.
On the issue of quantitative, Mr. Gensler, have you read
the task force disclosure report, the so-called Bloomberg
report on the quantitative analysis on climate disclosures?
Mr. Gensler. [Audio malfunction].
Mr. Hill. Good. Thank you for that.
And in that, you note that they question the viability of
the Scope 1, Scope 2, and Scope 3 emissions report and
recommend other changes, and yet, we have legislation demanding
that use and mandating it.
You are asking the staff to look at all sources of emission
types, not just Scope 1, Scope 2, and Scope 3, I presume?
Mr. Gensler. We are, and I hope that after public comment
[audio malfunction].
Mr. Hill. And on the qualitative focus that you have when
you try to have companies describe in their financial
statements qualitative factors about their climate resiliency
and planning, how do you establish a liability standard for
that? Is that the same as a material statement and the
financial statements?
Mr. Gensler. We currently have [audio malfunction]
financial statements, called management analysis, risk, and the
like [audio malfunction] Qualitative risk [audio malfunction].
And so, I think it would be [audio malfunction] see what
happens after public comment.
Mr. Hill. And one of the biggest challenges in the
financial task force report on climate disclosures is that it
really is not possible to do make it comparable and accurate
[audio malfunction].
There it goes again.
Madam Chairwoman, I am going to yield back, because this is
too frustrating.
And let me say again, I hope that we will have hearings in
person and that we will stop these kinds of online issues. You
have heard Members today talk about how they can't have a fair
and open interchange with witnesses. And when we have
technology that simply mutes itself, we ought to all question
any technology the committee is using.
I yield back.
Mr. Huizenga. And if the gentleman will yield, frankly, all
of Mr. Gensler's answers to you were in a three-part echo on my
end. I doubt I am the only one [audio malfunction].
Chairwoman Waters. The gentleman is out of order.
The gentleman from Illinois, Mr. Foster, who is also the
Chair of our Task Force on Artificial Intelligence, is now
recognized for 5 minutes.
Mr. Foster. Thank you. Am I audible and visible here?
Chairwoman Waters. Yes, you are.
Mr. Foster. Okay.
Thank you, Chair Gensler.
First, are you making contingency plans for dealing with
the market chaos that may result if Senate Republicans force us
into default?
Mr. Gensler. I thank you for the question.
I do want to say, if Representative Hill would like to meet
with me one on one or anything next week, or in the next few
days, I would be glad to do that.
And Representative Huizenga, I thank you, because I was
hearing that echo as well.
But on your substantive point, Representative Foster, I
think that as we get closer to October 18th, we need to
understand that markets can get pretty--they can do things that
we don't expect. That as mutual funds, as big banks, as hedge
funds, as capital market participants start to anticipate what
will Congress do, and what will Congress not do, we will be in
uncertain times in those last several days.
And God willing, everything works out. But if we were to
end up with a default, we will have a whole lot of uncertainty
in major market participants in the several days before as we
would move into that uncertainty as various participants react.
Mr. Foster. I understand that you can't go into details
now, but would you be willing to provide a confidential
briefing to interested members of this committee on that
scenario planning as it approaches, as the deadline approaches?
Mr. Gensler. If we could follow up, I would certainly want
to work with the Chair and probably with Secretary Yellen on
that, because that is really where the main authorities and so
forth are, but I would say that--
Mr. Foster. You will have to deal with the market chaos.
Mr. Gensler. I do not take lightly the uncertainties that
will start to develop right around that time.
Mr. Foster. Now, from the point of view of the markets, is
there any downside that you perceive in response to all of this
brinkmanship that the debt limit is just either outright
repealed, or through reconciliation, simply raised to an
Avogadro's number of dollars or some enormously high number
that makes it irrelevant?
Mr. Gensler. However Congress addresses it, it would lower
uncertainty in the market, and by lowering uncertainty in the
market, you usually lower the cost of capital for those raising
it.
Mr. Foster. Okay. I would just like to mention that in
terms of an outright repeal, I have a bill, the End the Threat
of Default Act, with over 50 House cosponsors, which will
simply do just that. And I invite and welcome all support from
all corners on just getting rid of this silly rule that we made
up for ourselves.
I would like to return once again to payment for order
flow. As we all know, zero-commission trading is not free,
because the retail customer often pays for it in terms of less
than optimal order execution.
The difficulty here, as I see it, is that there is no
transparent market between trading platforms that includes good
knowledge for investors of the quality and the total cost of
order execution.
Now, there are two possible responses to this that I would
like to get your reactions on, that either the SEC or Congress
could contemplate.
The first is simply requiring that retail customers
receive, along with their order confirmation, a summary of any
fees or commissions plus a summary of how the price they
actually receive compares to some fair estimate of the market
price, for example, midpoint of the NBBO or some more
sophisticated estimate.
This would allow investors to see over time whether the
total cost of trading on one platform was better or worse than
another, and to move their business to the platform that gave
them the best total cost of trading.
That is the first suggestion to which I would like you to
react.
A second possibility is simply to allow retail investors to
request that their order and the platform that it was executed
on be made public, not the investor identity but the platform
identity. Also, the time they placed the order and the price
they received.
This would allow third parties looking at this additional
publicly-available data to give very high-quality, high-
statistics evaluations of which platforms are giving the best
total cost to retail investors in different market segments.
Do you have any reactions to these? Are they implementable?
Would they work as I would imagine they would in making a more
transparent market?
Mr. Gensler. If it would be okay, I would like to suggest
that your staff and some SEC staff could review this. You have
really raised, how can we make these markets more efficient,
more competitive? I think it would probably help to hear these
ideas and sort them through outside of the hearing just to see
whether they could be part of the mix.
Mr. Foster. Thank you. I am out of time here, but I think
transparency on total cost of trading should be our guide star
on this.
And I yield back.
Chairwoman Waters. The gentleman's time has expired.
The gentleman from Minnesota, Mr. Emmer, is now recognized
for 5 minutes.
Mr. Emmer. Thank you, Madam Chairwoman. Can you hear me?
Chairwoman Waters. Yes, I can hear you.
Mr. Emmer. Thank you.
Chairman Gensler, like everyone else, I want to thank you
for appearing before the committee today. I appreciate your
time.
You have already covered this topic with some other
members, but I want to go into it again. There are millions of
Americans, as you know, who hold cryptocurrency. Specifically,
over 55 million Americans are now engaged in this asset class,
and the value of these cryptocurrencies, the value of the
market, is approximately $2 trillion.
You have been outspoken in that you think most
cryptocurrencies on the market are securities. I couldn't
disagree with you more thoroughly. I believe most
cryptocurrencies are commodities or currency.
But for the purpose of better understanding your
perspective, I have several quick questions I would like to run
through during my time, and I would appreciate quick responses
to each question.
Chair Gensler, let's say someone who issued a token agrees
with you and thinks that their token is a security, and they
want to register it with the SEC. If they register it, can they
trade it on the New York Stock Exchange, or could they trade it
on NASDAQ?
Mr. Gensler. It would somewhat depend on NASDAQ's and the
New York Stock Exchange's listing rules and how they register
it. But there are multiple ways to register it. If they
register it, and the New York Stock Exchange and NASDAQ said
yes, that might facilitate it. Nobody has asked to do that, as
far as I understand.
Mr. Emmer. Actually, the answer is, ``No.''
Another question, can a broker-dealer, like Charles Schwab,
deal in a digital asset that has gone through SEC registration?
In other words, would they be able to trade these digital asset
securities in custody?
Mr. Gensler. The custody is really the issue that you have
mentioned. We have not been able to sort through that. There is
a feature of crypto assets which is that a private key
transfers ownership. That is a feature, but it also creates
challenges, or some would say it is both a feature and a bug of
the custody of those crypto assets.
Mr. Emmer. Again, I believe the answer is, ``No.''
And I think earlier today you used the term, ``stable value
coins.'' There is no such thing. Value is a term that you put
in there. There are stablecoins.
Chair Gensler, as you know, there are about 100 tokens with
a billion-dollar market cap. Let's say you deem one of these
coins with a billion-dollar market cap and tens of thousands of
investors as secure. What happens to those investors, sir?
Mr. Gensler. If the coin were to come in and to actually
register, then those investors get the benefit of our
securities laws. Right now, they don't have the benefit of that
basic bargain that we protect people against fraud and
manipulation in our capital markets is that they get full and
fair disclosure. They are not getting that right now, and it is
falling short, and people are going to get hurt.
Mr. Emmer. Chair Gensler, actually, what will happen under
that scenario is that the value of the token will plummet, and
retail investors, the very people you are supposed to protect,
will not be able to trade it.
I guess where I am going to go with this is, if there is no
path for them to be traded anywhere, wouldn't investors be hurt
by your enforcement actions? And what are you doing to solve
this problem? What are you going to do?
Mr. Gensler. What I have said publicly, and I mean this, is
come in and work with us. If the rules that were written in
other decades don't quite fit these digital investment
contracts--and that is what many of these are; they are
entrepreneurs, computer scientists who are raising money from
the public, and the public is anticipating profits.
And that is why Congress painted with a broad brush, and
the investing public is relying on some group of entrepreneurs
and computer scientists for their profits.
And I am glad to work with Congress, if you want to repeal
the laws as they are, so that fewer people are protected
against fraud in these markets.
Mr. Emmer. Actually, Chair Gensler, I appreciate the
answer. I don't know--at the end, we still disagree on the
securities aspect. I think the vast majority are currency or
commodities.
But this is why it is really important for the SEC to
develop a framework in which the crypto industry can operate.
Crypto is one of the highest-performing asset classes in
decades. Retail investors got into this space before
institutional ones.
Your job, the SEC's mandate, is to protect investors;
maintain fair, orderly, and efficient markets; and facilitate
capital formation. When you make conclusory public statements,
and regulate through enforcement actions, you jeopardize that
mandate.
I encourage everyone to take a look at my bipartisan bill,
the Securities Clarity Act, which amends securities law with a
new definition, the investment contract asset, so the SEC can
work with issuers to swiftly determine when a token is offered
as part of a securities contract and when it is not.
Thank you again, Chair Gensler.
Madam Chairwoman, I yield back the balance of my time.
Mr. Gensler. Thank you.
Chairwoman Waters. Thank you very much.
And, Mr. Gensler, I want you to know that I appreciate your
known expertise on cryptocurrency.
With that, the gentlewoman from Iowa, Mrs. Axne, who is
also the Vice Chair of our Subcommittee on Housing, Community
Development, and Insurance, is now recognized for 5 minutes.
Mrs. Axne. Thank you, Madam Chairwoman.
And thank you, Chair Gensler, for being here. And thank you
for your willingness to work on modernizing our corporate
disclosures that, of course, look at gamification on our
trading platforms.
I am very focused on equity for the people who want to
invest, and I appreciate you wanting to make sure that this is
an opportunity for people across our country.
But I want to dig into a different aspect of investor
protection, and we are talking a lot about crypto today.
Chairman Gensler, can you briefly describe what the
Securities Investor Protection Corporation does?
Mr. Gensler. The Securities Investor Protection
Corporation, or SIPC, as it is sometimes known, was set up by
Congress to protect the retail public who left money at a
brokerage firm, and if that brokerage firm wasn't properly
keeping that money segregated and protected, it went bankrupt,
in essence, the losses that might come. I don't claim to be a
full expert, and I am sure I have missed some parts of it, but
I think that is the basic bargain.
Mrs. Axne. Okay. So, basically, when someone owns a
security in their brokerage account, they have some protection
if the broker goes bankrupt. Is that correct?
Mr. Gensler. That the broker didn't take that security and
give it to somebody else and the like. You still have market
risk. Individuals have market risk that SIPC doesn't protect
them from, as I understand it.
Mrs. Axne. Okay. But what I want to get here is, I don't
think that applies to commodities or some other assets. Is that
correct?
Mr. Gensler. I would want to work with you on that, but I
think that is correct.
Mrs. Axne. Okay. Here is what I am wondering. On some of
our platforms, you can trade crypto literally right next to
stocks for a token that isn't a security. What are the
differences in protections for those investors?
And we have these up on our platforms. Do you think these
investors on these platforms are likely to know that these
protections are different? I am hearing you say they are
different. What is the difference between crypto and a stock?
And do you think our folks even realize that when they come on,
as far as protections go?
Mr. Gensler. I think you are right, that the investing
public is not getting protected right now, whether it is a
digital asset that is a security. And many of them, I think,
would--while Representative Emmer and I have a little
difference of opinion on that--pass the Howey Test and our
securities.
But some, as you say--a few might be commodities. And the
Commodity Futures Trading Commission (CFTC) does have
enforcement authorities around commodities. CFTC Commissioner
Dawn DeBerry Stump put out a paper recently which highlighted
that they don't have the regulatory authorities to write the
rules of the road for those exchanges.
There are gaps there, both if they are a commodity, and
gaps if the exchanges are not registered as the New York Stock
Exchange is registered.
Mrs. Axne. Okay. So, if we tie this back to the payment for
order flow, on securities, the broker has to disclose, of
course, how much they are paying and how those orders do. I
think those disclosures aren't really sufficient and could be a
lot better.
But, Chair Gensler, are there any such disclosures like
this for crypto assets?
Mr. Gensler. There are not required disclosures. Some of
the brokers are trying to do some voluntary disclosures on
things that are basically similar to the payment for order flow
for crypto. But you are absolutely right, they are not doing so
with the fullness as under our securities laws.
Mrs. Axne. Something that caught my eye is just how much
money some brokers are actually making from payment of just
their crypto orders. If I am correct, and I think this is true,
Robinhood made more than half of their revenue from crypto in
the second quarter. And, yet, we don't have the same
disclosures about how that is earned for them and how their
users might be doing these orders.
Are there steps that the SEC can take to ensure that
investors understand the protections they have when trading
certain things, and information that they might lose in certain
areas on the platform? Or do you think that we should just make
sure that anyone trading on those platforms has the same
protections regardless of what they trade? And is just
disclosure enough there, or do we need to be moving in a
different direction?
Mr. Gensler. I think that decisions Congress made long ago,
in the 1930s, still stand true today, that the trading
platforms, the exchanges of the day back then that come in and
register and follow a set of rules, how they expose orders to
each other, how they compete in the marketplace, how we protect
people against front running, and how we protect and promote
markets through transparency.
So, these platforms, in a regulated space, would be better
for investors. And right now, we don't have that, and this is a
highly-speculative class of crypto tokens.
I truly think people are--we are probably going to have
hearings in the future on what went wrong here, and one of the
things will be that these platforms didn't come in and get
regulated with the appropriate authorities.
Chairwoman Waters. Thank you very much. The gentlelady's
time has expired.
Mrs. Axne. Thank you.
Chairwoman Waters. The gentleman from Georgia, Mr.
Loudermilk, is now recognized for 5 minutes.
Mr. Loudermilk?
If not, is Mr. Zeldin on the platform here?
If not, let's go to Mr. Mooney.
Mr. Mooney, you are now recognized for 5 minutes.
Mr. Mooney. Okay. Thank you very much. I appreciate the
hearing and the opportunity to participate. These are some
important issues here that we are discussing.
Chairman Gensler, I would like to focus on the difference
between what is considered guidance and what are considered
rules.
Changes in rules and enforcement have large ramifications
for market participants, both large and small. That is why it
is important for investors to understand the difference between
binding and nonbinding directives from the SEC.
Now, your predecessor, Chairman Clayton, was very clear on
this issue. He released a statement in September of 2018
explicitly clarifying that, ``All staff statements are
nonbinding and create no enforceable legal rights or
obligations.''
Chairman Gensler, will you commit to releasing a similar
statement clarifying that all staff statements are nonbinding?
Mr. Gensler. Let me say it in my own words.
I think that rules put out through notice and comment to
the public benefiting from economic analysis is what we are
trying to do on many of these issues we have talked about
today.
Guidance can also be an important tool of an agency like
the SEC where market participants come in and say, ``There is a
rule already. Can you please issue guidance within that rule?''
And we have been using this for many decades, whether it is
in the accounting area, the auditing area, sometimes investor
alerts, investment management. I think this is an important
tool, but it is always within the rules that are already
outstanding.
Mr. Mooney. Okay. Thank you for that answer. I encourage
you to release a similar statement. I think doing so would
provide clarity for investors who want to make sure they
understand the rules they need to follow.
Let me just give you an example. Whistleblower reforms that
were adopted in 2020 codify existing procedures and improve the
SEC's ability to provide awards that incentivize whistleblowers
to step forward. In August, the SEC, under your leadership,
released a statement regarding the whistleblower rule.
The SEC is able to revise and visit old rules and make
changes, obviously, to the notice and comment rulemaking
process, as we just discussed. But in this case, it appears the
Commission attempts to nullify an existing rule simply through
a public statement.
In response, SEC Commissioners Peirce and Roisman said that
this action raised a dangerous precedent and, ``reduces the
certainty of law.''
Chairman Gensler, in this case, it seems you adopted a
significant change in policy simply through a Commission
statement. How is that not a way to avoid the notice and
comment rulemaking process we just discussed?
Mr. Gensler. The whistleblower program is a really
important program to help protect the markets, and what I asked
staff to do is look at our program and ensure that that
whistleblower release of last year and the prior rule set are
the things that we could do to ensure that whistleblowers in
such a critical program have not only the basic protections,
but also, as Congress laid out, that they, when it is
appropriate under the rules, get their awards, which range from
10 to 30 percent. And this had to do really with the nature of
the awards.
Mr. Mooney. Okay. Thank you, Chairman Gensler. It seems the
whistleblower changes could lead to more and more changes of
rules, and attempts to change rules through simply making
public statements. I worry that the Commission could set a
precedent that public statements override established
rulemaking, and that would cause our markets and investors to
suffer.
Notice-and-comment rulemaking forces regulators to take
their time, and listen to the public before finalizing
regulations, and this comment period is important for getting
rules right.
Chairman Gensler, I have heard you talk about the big,
ambitious plans you have for your tenure at the SEC. I remind
you that Congress makes the laws, not the agencies. It is not
within your power to create new policy and avoid the notice and
comment rulemaking process.
Thank you, Madam Chairwoman, and I will yield back the
balance of my time.
Mr. Gensler. Yes. And I will say, I like notice-and-comment
rulemaking. You hear from the public. The consultation is a
constructive part of our Agency's work.
Mr. Mooney. Okay. Thank you.
Chairwoman Waters. Thank you.
The gentleman from Texas, Mr. Green, who is also the Chair
of our Subcommittee on Oversight and Investigations, is now
recognized for 5 minutes.
Mr. Green. Thank you very much, Madam Chairwoman.
And, Chairman Gensler, I thank you very much. I am greatly
appreciative of what you have been able to accomplish.
I am especially gratified that you have supported the
Whistleblower Protection Reform Act of 2021, something that our
office has been able to sponsor and to work with the General
Counsel over at the SEC to strengthen. It means a lot to do
this, and it means a lot also to have the level of cooperation
that we have received from you.
As you well know, and for the edification of others who
might not know, this legislation expands upon what we did in
the last Congress with the Whistleblower Protection Act, and
that passed the full House with only 12 persons dissenting, 12
folks in opposition.
This Act revises the burden of proof, it authorizes
compensatory damages for whistleblowers who are not fired but
who suffer some other forms of retaliation, and it protects
them. It protects whistleblowers who report orally rather than
doing so in writing.
I think it is a significant piece of legislation. I am very
grateful that Public Citizen has expressed its support for the
legislation.
If you can, Mr. Gensler, given that we have legislation,
what do you think this legislation will do in terms of being
helpful to the extent that other legislation that we did not
get through could not accomplish?
Mr. Gensler. Congressman, I look forward to looking at the
details of the legislation. But I think in the direction that
you just outlined, the support we can give to whistleblowers so
that they will come forward, is a hard thing to do. Say, you
are working inside of a company, inside of an asset manager or
others and say, ``Something is going on here that is amiss.''
And to come forward, to talk to an agency like the SEC,
takes a fair bit of gumption. So, anything that we could do to
help encourage individuals to do that, is a really important
part of our oversight of markets.
We, of course, get other sources of leads. We see things in
the media. We have a terrific staff of examiners and
enforcement personnel and economists. But the whistleblower
piece is an important piece of our overseeing the markets.
Mr. Green. Thank you. I concur with you totally. And I
would add something in addition.
Knowing that whistleblowers are protected will also act as
a deterrent within the corporate structure. I think that
whistleblowers who have this added protection will come
forward, but it is knowing that they can come forward with the
added protection that I think will make a difference as well.
Any comments on just the deterrent effect?
Mr. Gensler. I think it is an important deterrent effect. I
remember when Senator Grassley was leading this back in the
Dodd-Frank Act and working across the party lines.
I think having whistleblowers be part of our examination
and enforcement regime and having a cop on the beat helps deter
fraud and manipulation in our markets. It also helps companies,
good faith actors, do their jobs better because it lowers
uncertainty for investors.
Mr. Green. Thank you.
And finally, I am inviting and requesting my colleagues to
please support this legislation. It is a means by which
Congress can weigh in and have a significant impact in a very
positive way.
I am grateful to you, Mr. Gensler, and I thank my
colleagues who will support it, and I look forward to working
it through the House.
Thank you, Madam Chairwoman, for your support as well.
Thank you.
Chairwoman Waters. Thank you very much.
The gentleman from Georgia, Mr. Loudermilk, is now
recognized for 5 minutes.
Mr. Loudermilk. Thank you, Madam Chairwoman. Can you hear
me now?
Chairwoman Waters. Yes.
Mr. Loudermilk. Okay. Thank you. I had maybe the same thing
that was happening to Mr. Hill. But thank you for this
opportunity.
Chairman Gensler, when you testified before this committee
in May, you and I discussed the Consolidated Audit Trail (CAT).
And you assured me that most of the investors' personally
identifiable information (PII) that was originally going to be
collected in the CAT, including Social Security numbers and
birth dates, will not be collected because the SEC was working
on amending the CAT plan to remove that data.
However, it appears that those changes still haven't been
finalized. And unless they are, the PII will be collected.
The question is, when will the SEC finish the rulemaking to
remove most of the PII from CAT?
Mr. Gensler. If I could follow up after the hearing and
find out our exact dates, but I concur with you that removing
that data from the CAT is important. I know that it is on our
docket. I have met with the people in our Trading and Markets
Division who are working on that a number of times since you
and I last spoke. But I would have to follow up with an update
as to which month we think we will finalize that.
Mr. Loudermilk. I would appreciate itif you could follow up
with us because, as you can see and as we all can see,
cybersecurity is a critical issue right now with all that is
going on, and it is just going to continue to get worse. And I
think that we definitely have to protect the PII of investors.
So, if you will get back with us, I would appreciate it.
On another note, last year the SEC finalized amendments to
its rules regarding proxy voting and whistleblowers. However,
soon after you became the SEC Chair, it appears to me you
unilaterally decided that the SEC was not going to enforce
those rules. Those decisions were announced via a Commission
statement and not a rulemaking.
Two of the other Commissioners noted that the SEC has a
reputation as a steady regulatory machine because it has
generally avoided [inaudible] Rules and is not [inaudible]
Rulemaking when there is no new [inaudible] To justify
reopening them.
It appears that there may be some picking and choosing of
which rules to enforce and which rules to ignore, based on
which ones you like and which ones you don't like. Is this the
direction that you are going? Is this the SEC Chair's job, to
selectively enforce the rules based on personal preference? How
do you justify that?
Mr. Gensler. I think that at the heart of shareholder
democracy it was really an important feature that many fund
managers get advice from proxy advisers, and as you rightly
said, there was a rule that was finalized last year.
What I asked staff to do was to take a look at that, to
take a close look at that, and make any recommendations--again,
through the five Commissioners, through notice and comment--
about whether there should be any changes to that.
Again, through the notice-and-comment period, and that is
what I announced earlier this year, that I asked them to do.
Mr. Loudermilk. Okay. Finally, I would like to note that
President Obama's SEC Chair, Mary Jo White, opposed hijacking
securities laws to push social and cultural issues. But based
on the SEC's agenda, which includes issues like climate change
and diversity, it appears you intend to do exactly that.
You often say that investors want ESG disclosures, but in
2020, shareholders made 140 ESG proposals, and all but 6 of
them failed, and in the average vote, only 30 percent were in
favor.
Only a relatively small number of activist investors want
mandatory ESG disclosures. I hope you will avoid using
securities disclosures to push a left-wing political agenda and
recognize that all companies are already required to disclose
all material information to investors.
And with that, Madam Chairwoman, I yield back.
Chairwoman Waters. Thank you very much.
The gentlewoman from Massachusetts, Ms. Pressley, who is
also the Vice Chair of our Subcommittee on Consumer Protection
and Financial Institutions, is now recognized for 5 minutes.
Ms. Pressley. Thank you, Madam Chairwoman, for convening
this hearing.
Since the 2008 financial crisis, the private equity
industry has exploded, tripling the amount they manage from
$1.5 trillion to $4.5 trillion.
Now, while banks are subject to certain SEC reporting
requirements on their private assets, private equity firms do
not have to provide that same level of transparency, and are
not subject to the same regulatory scrutiny, and they benefit
from that.
Chair Gensler, what tools is the SEC using to better
monitor the activities that a lot of these nonbanks, like
private equity firms and hedge funds, are engaging in,
considering they have great impacts on the economy and
consumer-facing business?
Mr. Gensler. Thank you, Representative Pressley. It's good
to see you again, by the way.
But in terms of private equity, you are right, our capital
markets have the public markets, have the private markets, and
then the intersection of the two.
And I have asked staff to ensure, the best we can, that the
arrangements between the general partners, the people managing
this money, the investment managers, and their investors, often
their limited partners, that those arrangements have the
appropriate transparency and that the investment managers are
living up to their responsibilities, their duties, their
contractual duties, but also their duties under the law in
terms of representing those investors. I think that is really
important.
I have also asked staff whether we should update some of
the data that we collect, and it might not have been the center
of your question, but on Form PF, or on private fund, in that
regard.
Ms. Pressley. Yes, that actually is the center of my
question, which is, would you be expanding reporting
requirements? That sounds like a, ``Yes.'' And if that is true,
could you speak to the timeline? How soon do you plan to take
those steps?
Mr. Gensler. In terms of timelines, again, I would need to
come back to you because I sometimes can't remember every month
and everything. But I have been meeting--last week, I had some
more meetings with staff on enhancements, potential
enhancements to what we Form PF, or private fund, and also a
separate project in terms of the responsibilities and
obligations between the investment manager, GP, and the LP. But
I would have to come back and say when staff will serve up
recommendations to our Commission.
Ms. Pressley. That is fine, and we look further to speaking
further offline, certainly just looking for bold and necessary
action here as soon as possible.
The affordable housing and eviction crises are racial and
economic justice crises, and stable housing has been a matter
of life or death for millions of people vulnerable to eviction
during this pandemic. And in 93 percent of the counties in the
U.S., including in the district I represent, the Massachusetts
7th, a full-time minimum wage worker cannot afford a one-
bedroom rental home.
Nationwide, over 40 percent of Black and Brown households
spend more than a third of their income on rent. In
Massachusetts, a minimum wage worker must work 87 hours a week
to afford a one-bedroom rental home.
Meanwhile, private equity CEOs are living lavishly, and
pocketing billions of dollars in profit off of the backs of
these hard-working families struggling to keep a roof over
their heads.
It has been well-documented how private equity firms were
protected from the 2008 economic crisis. After millions of
people lost their homes to foreclosure, private equity firms
bought residential properties at a deep discount, and later
raised rents, gouging tenants with fees, skimping on
maintenance, and using aggressive collections and eviction
strategies.
Now, private equity landlords control at least one million
apartment units and at least 250,000 single-family homes. And
these aren't high-end homes. These are the entry-level homes in
once-affordable housing units that low-income families,
disproportionately Black and Brown families, occupy.
This is why families can't afford to buy homes. When the
economy is down, private equity buys up the neighborhood, guts
it, and rents it for twice the price.
So, we have reason to be concerned that the private equity
industry will seek to profit off of the displacement of
families during a global pandemic, no less. For example,
Blackstone, the world's largest private equity firm, has
previously been called out by the United Nations for inflating
rent, aggressively pursuing evictions, and fueling the global
housing crisis.
Chair Gensler, it doesn't have to be like this. Housing is
a human right. I know our chairwoman agrees. I implore you to
take action to help address these egregious behaviors, and I
look forward to following up with you offline.
Thank you. And I yield back.
Chairwoman Waters. Thank you so very much, Ms. Pressley.
The gentleman from Ohio, Mr. Davidson, is now recognized
for 5 minutes.
Mr. Davidson. Thank you, Madam Chairwoman, and thank you,
Ranking Member McHenry.
And Chairman Gensler, thank you for your time here today.
In 2018, there was a New York Times article that discussed
your views on blockchain and various cryptocurrencies. One of
the cryptocurrencies discussed in the article was Ethereum. In
the article, you said that Ether could have problems with
securities laws because some of the first tokens were sold by
the Ethereum Foundation before the network was actually
functional. You went on to say that Ethereum could get off the
hook from securities laws due to the fact that it developed
into a decentralized network.
You have repeatedly said that you believe initial coin
offering tokens are securities. But right here, it sounds like
you are acknowledging that Ether transitioned from what would
have been a security into a commodity once the network was
adequately decentralized.
Can you clarify when a token is sufficiently decentralized
to no longer be a security, in your view?
Mr. Gensler. I thank you for that, and for digging back to
an article from 3 years ago. But I was honored to study and
research these issues at MIT. And what I was commenting on then
was a process that the SEC was going forward on, and I think
the then-head of Corporation Finance was talking about in that
timeframe.
So, without going into any one token, what I think the core
test is, and it is the test the Supreme Court has taken up
numerous times with a broad brush, is that you are raising
money from others and the investing public, and anticipating
profits based upon the efforts in some collective group of
individuals.
That central test is called the Howey Test. There are other
broad brushes with regard to this as well, as to when something
is a note, called the Reves Test, that Thurgood Marshall wrote
a few decades ago.
Fundamentally, the SEC is here to help protect the public
from fraud, and that is why Congress painted with a broad
brush.
Mr. Davidson. Yes. Thanks for the clarification.
Unfortunately, Congress didn't create the Howey Test; the
courts did. And the same with the Reves Test. And, frankly, we
are dependent on this patchwork of regulation by enforcement.
Obviously, there are people who feel that a particular token,
like Ether, is treated differently than one like XRP, for
example, a matter that is before you right now, because of the
same thing. Is it centralized, or is it decentralized? Who has
control?
And I think that really gets to the issue. Congress really
should clarify. We have had a bipartisan legislation called the
Token Taxonomy Act drafted since 2018, and we can't get a
hearing on it. It would provide a bright-line test that would
apply a 1950s case law, the Howey Test, to modern digital
assets and provide some of that clarity.
But could you, generically speaking, talk about the
shortcomings of enforcement actions or even threatened
enforcement actions versus the need for clarity, maybe a
rulemaking process that would establish a bright line?
Because, really, what you referred to was, well, come talk
to us in a one-on-one kind of Third World way, where every
individual firm cuts their own deals.
What the market really needs is clarity. Wouldn't that be
better than threatened enforcement?
Mr. Gensler. I actually think that the securities laws are
pretty clear on this, sir, and I think that firms should just
come in and register.
But what has happened over the last 4 or 5 years is they
have either chosen not to or they have stood up in Singapore or
Malta or Hong Kong or other countries and offered their
services indirectly through virtual private networks. Not all
of them; some of them are here in the U.S. as well.
And I think that our securities laws were written for a
reason: to protect the public, the investing public.
Mr. Davidson. Yes, I think you are right, we should protect
the public, but we need to do so with clarity. And frankly, we
should do it in a way that doesn't destroy the market. You are
talking about fintech being the leading innovation.
America has led in market after market after market in the
field of technology, from the agricultural revolution, to the
industrial revolution, and on up through the internet age. Why
would we want to destroy the fintech revolution and push it
outside the United States when we can foster it?
I refer to your threatened enforcement action on yield
products, for example. We should go through a rulemaking
process--or, frankly, Congress should act--which is why I am
drafting a bill that should be submitted shortly to clarify
yield products and how they should be protected.
The last thing I would say is, certainly not all
stablecoins should be considered securities, and I think you
have referenced that. But I look forward to working with you
and your office to provide clarity for our markets.
And I yield back.
Chairwoman Waters. Thank you.
The gentlewoman from North Carolina, Ms. Adams, is now
recognized for 5 minutes.
Ms. Adams. Thank you, Madam Chairwoman.
And thank you, Mr. Chairman, for being here.
As you may know, I recently introduced the Registration
Index-Linked Annuities Act (RILAA). In recent years, there has
been an increase in demand for RILAAs, and these products,
which provide the benefits of market exposure while
simultaneously offering protections against extreme downward
market volatility.
I have heard from issuers of RILAAs, including companies
located in my district here in North Carolina, that the lack of
a tailored form of registering these products has complicated
their ability to market these products effectively.
The Consumer Federation of America, the American Council of
Life Insurers, and others have endorsed the bill, and it has
strong bipartisan support from members of the committee. I
wanted to just flag this for you, like Senator Smith of
Minnesota did in your last hearing. But I look forward to
working with you to advance this legislation.
I would be happy to hear any thoughts that you have on this
matter.
Mr. Gensler. No, I thank you. I thank Senator Smith for
flagging it in the last hearing as well. And I think that
index-linked annuities have come under the securities laws for
quite some time, but what you are flagging is the forms that
they fill out, could we find a way to basically change the
forms they fill out at the SEC?
Since the Senate hearing, I have actually asked the staff
to consider some of the things that you and the Senator have
raised and to make some suggestions.
Ms. Adams. Wonderful. Thank you very much.
This committee has been advocating for the creation of
Offices of Minority and Women Inclusion (OMWI) across financial
regulators. These offices are to ensure that internal staffing
and procurement policies are inclusive and encourage all
regulated entities to follow suit.
What are you and the OMWI Office doing to increase
participation?
Mr. Gensler. The OMWI Office, headed by Pam Gibbs, is a
terrific ally internally in terms of trying to promote more
minority and women inclusion in our hiring, and in our
promoting, in our senior ranks. I think, while we have made
some progress at the SEC, there is still a lot more progress to
make in this regard as an agency.
We are also, beyond that, looking to see what we can do to,
as we talked about earlier, in terms of various questions that
we put out to the industry as to what they are doing in the
same regard.
Ms. Adams. Okay. Have you considered making these
assessments mandatory? Or do you have any other inducement to
encourage greater participation?
Mr. Gensler. I think it would be good to have greater
participation. I have asked counsel and so forth.
I think while we are moving forward, and I hope that staff
will make recommendations, and that my fellow Commissioners
will support some notice and comment on disclosures around
diversity, disclosures around the board and the workforce
diversity, I think until we were to do that, it would really be
up to Congress to have participation, as you said, mandatory
participation in some of these current industry surveys.
Ms. Adams. Okay. Great. Thank you very much.
Madam Chairwoman, I am going to yield back.
Chairwoman Waters. The gentleman from North Carolina, Mr.
Budd, is now recognized for 5 minutes.
Mr. Budd. Thank you, Madam Chairwoman.
And thank you, Chairman Gensler.
China has been on a warpath against cryptocurrency, it
seems, since 2013. And we have seen them implement bans on
mining, initial coin offerings, cryptocurrency exchanges, and
their most recent move, an outright ban on cryptocurrencies
themselves.
Chairman, do you support what China has done? And is the
SEC planning on implementing similar bans?
Mr. Gensler. I am familiar with a number of the things that
you have mentioned in terms of the People's Republic of China.
I think our approach is really quite different, and it is a
matter of, how do we get this field within the investor and
consumer protection that we have, and also, working with bank
regulators and others? How do we ensure that the Treasury
Department has it within anti-money laundering, the tax
compliance, and of course, the financial stability issues that
stablecoins could raise as well?
Mr. Budd. But no bans that you are interested in
implementing via the SEC as China has done really to funnel
everyone through their own digital currency?
Mr. Gensler. No, that would be up to Congress. We are
really working with the authorities you have given us, and I
have said this. I think that many of these tokens--and it is
based on the facts and circumstances--but many of these tokens
do meet the test of being an investment contract or a note or
some other form of security, that we bring them within the
investor protection remit of the SEC.
Mr. Budd. Thank you.
Let's talk about innovation for a moment, which has made
the U.S. markets the envy of the entire world, the nature of
the innovation that we have here.
In referring back to the Senate Banking hearing that you
were in, I think you stated before you were in your current
role, you said, ``Innovation is what supports access, economic
activity, and gives so many of us better opportunities in
life.''
As the Commission continues to review proposed changes,
will you commit to balance any changes with the impact it will
have on everyday investors?
Mr. Gensler. I think that is at the core of our mission,
our three-part mission, but also to balance the economics.
Innovation, as I said then and will say now, does help
increase our economy, increase access to capital. It is why I
studied it. I was fascinated to study this at MIT, the
intersection of finance and technology.
But I think that new technologies rarely last long if they
try to stay outside of whatever public policy goals that a
society lays out. Investor protection has worked for us for 90
years, and I think it is an important piece of whether
cryptocurrency is going to survive or not and meet its
potential, whatever that potential might be.
Mr. Budd. Thank you.
You said multiple times that the SEC has a great deal of
clarity on what exactly is a security. Given the SEC's approach
to using enforcement as a way to regulate, you stated before
the Agriculture Committee, in 2018, ``The SEC will need to
decide if they might issue rules and interpretations specific
to the crypto space.''
Now that you are leading the SEC, will you describe areas
in which you plan to provide additional guidance and even
enforcement?
Mr. Gensler. I want to say that I think the enforcement
actions, the 6 or 7 dozen enforcement actions over 4 or 5 years
that the SEC has brought in this space, by my predecessor, and
that we continue to do, help to protect the public.
In terms of working with exchanges, platforms that come in
to try to register, it is really to look at our rule set to
ensure that we achieve the core of our rule set. But if there
are some pieces of it that don't fit, I use things like
transfer agents and others because they are easier for some to
understand, that might not fit particularly with these new
digital investment contracts.
Mr. Budd. Okay. I just have a few seconds left.
Madam Chairwoman, I yield back.
Thank you, Chairman Gensler.
Chairwoman Waters. Thank you very much.
The gentleman from California, Mr. Vargas, is recognized
for 5 minutes.
Mr. Vargas. Thank you very much, Madam Chairwoman. I thank
you, and I thank the ranking member for this committee hearing,
and I especially thank our witness today, Chairman Gensler.
Chairman Gensler, I believe public companies regularly fail
in the potential cost of climate change and environmental
exposure. Many companies, many public companies, fail to
disclose what I believe is key material information surrounding
corporate governance policies, such as employee and management
diversity or the lack thereof.
In response, the House passed H.R. 1187, the Corporate
Governance Improvement and Investor Protection Act. The bill
included my ESG Disclosure Simplification Act of 2021, which
requires public companies to annually disclose to shareholders
certain environmental, social, and governance metrics and their
connection to their long-term business strategy.
Chairman Gensler, on March 4th, the SEC announced the
creation of the Climate and ESG Task Force in the Division of
Enforcement. The task force focuses on developing initiatives
to, ``proactively identify ESG-related misconduct,'' and,
``identify any material gaps or misstatements in issuers'
disclosure of climate risks under existing rules.''
Chairman Gensler, could you provide the committee with an
update on the task force findings and the scope of their
investigations?
And, additionally, do you believe that all public companies
should be required to disclose relevant ESG concerns? I know
that you talked a little bit about big and small companies, but
could you elaborate a little more on that?
Mr. Gensler. Thank you.
I do think that investors have increasingly, over the
years, asked for greater disclosures on climate risk and on the
workforce. We have a separate project which might not fit into
your question on cyber.
The last time that the SEC put out guidance on this was in
2010, and the task force that was stood up in March of this
year was to ensure that investors were getting the benefit, not
just of that 11-year-old guidance, but that companies were
following their responsibilities under this disclosure regime.
But I think that really now is the time to put something
out to the public. The public can weigh in. How can we as the
SEC play a role to bring consistency, comparability, and, yes,
decision-useful information around the physical and transition
risks in climate that many of these companies are facing, and,
yes, around the workforce, including the diversity of that
workforce?
I think investors are asking for it, but, again, we will
find out when we put things out for notice and comment. We will
see what people say.
Mr. Vargas. You say that investors are asking for it, and
even some companies are already providing it. It is a different
level, different things. But aren't they already doing that,
some of these companies?
Mr. Gensler. Yes. I thank you for saying that, because you
are absolutely right. Of the top 500 companies by market cap, I
think 80 to 85 percent are right now putting out climate risk
disclosure on a voluntary basis.
It helps those companies, if we bring some consistency and
comparability to it. Imagine if companies, 400 or 500 of the
leading companies in the U.S., were just putting out
disclosures about their financials, but they were all deciding
different ways to report their financials or a different way to
report their executive compensation.
We have a role, and Congress gave us a role to try to
standardize that and bring some comparability. And it helps the
companies as well as the investors to bring some
standardization.
Mr. Vargas. I agree, and I think that is why the investors
are asking for it, and I think that is why a lot of the large
companies are giving it.
I do want to ask with the last minute that I have, I know
that a number of my colleagues are really hot on this crypto
stuff.
I have to tell you, people ask me all the time, ``Juan,
what is crypto? And how does that help the dollar? How does
that help the United States? How does that help anybody other
than traffickers, narcotraffickers, terrorists, or people
trying to make a quick buck? How does it help us to have this
cryptocurrency?''
I understand if the United States had a digital currency, I
could see how it could help the dollar. But how does that help
us, all of these cryptocurrencies?
Mr. Gensler. We have, around the globe, 180 fiat
currencies, meaning 180 different countries have one. But each
country has one. We have the U.S. dollar, and it happens to be
the leading currency around the globe.
It is unlikely that 5,000 or 6,000 private forms of
currency are going to persist. Economic history tells us that
is unlikely.
And a lot of these are not really currencies. They are not
being used to buy a cup of coffee at Starbucks. What they are,
most of them, are investment vehicles, ways to raise money for
entrepreneurs, and thus, they should come in, and they should
be within the securities laws.
The handful that might be competing with gold or silver as
a digital speculative store of value, as gold is a speculative
store value over the centuries. But not many of them. Most of
them are investment vehicles.
Mr. Vargas. My time has expired.
Chairwoman Waters. The gentleman's time has expired.
The gentleman from Tennessee, Mr. Kustoff, is now
recognized for 5 minutes.
Mr. Kustoff. Thank you, Madam Chairwoman. Thank you for
calling today's hearing.
And thank you, Mr. Chairman, for appearing today.
I read your column that you wrote several weeks ago,
``Chinese Firms Need to Open Their Books.'' I am just going to
ask you very broadly, what exactly are you saying? Of the 270
companies, you said they need to be prohibited from trading
here by 2024. What are you seeing, or what are you not seeing
with those companies?
Mr. Gensler. There was a basic bargain entered into on a
bipartisan basis about 20 years ago, the Sarbanes-Oxley Act,
that President Bush signed into law. And it said that to
instill greater trust in our markets after the Enron and
WorldCom fiascoes, and that was about accounting fraud in that
case, that companies' auditors needed to open up their books
and records to a new entity, the Public Company Accounting
Oversight Board (PCAOB), and we at the SEC oversee the PCAOB.
Nearly 20 years later, 50-plus jurisdictions have allowed
that to happen, from Europe, from Asia, from Africa, from South
America, and from North America, but two jurisdictions
currently are not: China and Hong Kong.
Congress came back together last December and said, let's
set a clock, a 3-year clock, for the PCAOB to see those
records.
In essence, there are three or four key things. Number one,
the PCAOB has to select which companies they are inspecting.
Number two, they have to see the work papers and see those work
papers of the auditors not redacted, not selected, but they
actually need to be able to talk to the auditors to basically
instill greater trust in the financials, in this case of these
China-related issuers.
Mr. Kustoff. As a follow-up, you did mention a specific
number, 270 companies, by 2024. Who are some of those
companies?
Mr. Gensler. These are the companies that I call China-
related companies, because many are actually incorporated in
the Cayman Islands and don't actually own anything directly
related to these companies, but many are the large internet
service providers in China or internet companies similar to our
large internet companies here that provide online retailing,
online services, but there are also some insurance companies,
and some oil and gas companies that are related to China as
well.
Mr. Kustoff. Let me, if I can, ask the same question a
different way. You did identify a specific number, 270--
Mr. Gensler. Oh. May I say that is just the number of
companies right now that are China-related, based upon
statistics that we can see from outside services. NASDAQ and
others just list a whole list of companies, and I could
certainly follow up and give you that. But we as an Agency, the
SEC, actually have a congressional mandate that, each year in
this 3-year clock that is ticking, we would publicly identify
specific companies. In the early part of 2022, if China and
Hong Kong are not yet compliant, then we would identify the
specific names of companies, and then do this a year later, and
a year after that.
Mr. Kustoff. Do you anticipate that number could grow?
Mr. Gensler. It could grow if there are more companies from
China or they are affiliated companies in the Cayman Islands
because many of these are actually Cayman Island issuers that
enter in arrangements called variable interest entity (VIE)
arrangements with China's companies. So, it could grow, but we
have actually--we at the SEC put a pause on that until we could
enhance the disclosures around these so-called VIE structures.
Mr. Kustoff. Lastly, Chair Gensler, in my remaining time, a
couple of months ago you stated before the Investor Advisory
Committee that you wanted your Commission staff to work on new
disclosure requirements for Special Purpose Acquisition
Companies (SPACs). Have you gotten those recommendations yet?
And, if not, when do you expect to see those recommendations?
Mr. Gensler. I have gotten them in terms of preliminary
recommendations, but not a full rule that I can put in front of
my fellow Commissioners. But I think that we can try to address
some of the disclosure issues around the SPACs that the retail
public--really, these are very costly vehicles for companies to
raise money and for the retail investing public. And I think we
can bring greater transparency and address some of the
conflicts, but I could follow up as to which month, I think,
that will be in front of our Commission.
Chairwoman Waters. Thank you so much.
The gentleman from New York, Mr. Torres, is now recognized
for 5 minutes.
Mr. Torres. Thank you, Madam Chairwoman.
It is a pleasure to see you, Chair Gensler. I have a
question about the neither-admit-nor-deny policy. If you, as a
public regulator, find that a company has engaged in wrongdoing
and then take enforcement action accordingly, is it fair for
the SEC to allow a company found to have engaged in wrongdoing,
is that fair and transparent and accountable?
Mr. Gensler. I think you raise a really important point for
agencies like our civil law enforcement agencies that, with a
group of limited resources, no matter what Congress gives us,
it is always a limited set of resources on how to best protect
the marketplace, and that is why I think it is so important to
have a remarkable Enforcement Division. I have said this, that
we hold, not only companies accountable but individuals
accountable; that we have a full rendition of the facts so that
the public understands why we might enter into a settlement--I
think what you have raised is usually in the context of
settlements; and that we even use all the authorities in terms
of individual bars; and where appropriate on occasion to--
Mr. Torres. Mr. Chairman, if I could just intervene, I am
asking if it is fair? Before we get to the resource question,
do you think that is fair? Do you think it is fair to have a
policy of settling cases without requiring admissions of
wrongdoing? Because I believe, and I suspect the majority of
Americans [inaudible] engaging in wrongdoing? Because there are
reputational consequences that come from admissions of
wrongdoing; if you defrauded your customers, I have a right to
know. Because if you allow them to settle and neither admit nor
deny, then a company can easily say, ``I never did anything
wrong. I never admitted to doing anything wrong; I just simply
paid off the SEC to go away.''
Mr. Gensler. I think you will find that I am largely in
agreement. It is the hard challenges of an agency like ours and
other agencies. We are not the only Federal regulatory agency
that is faced with this challenges of resources that what is
really important is to have a real, robust rendition of the
facts, to use the authorities around individual bars as your
right to go beyond fines because fines, all too often, are just
viewed as a cost of doing business.
Mr. Torres. Are you just--I want to move on to a new topic,
but are you saying that [inaudible].
Mr. Gensler. I'm sorry. You are cutting out.
Mr. Torres. Do you think that resource constraints make it
impossible to rethink the policy of settling cases without
requiring admissions of wrongdoing?
Mr. Gensler. I think I heard most of what you said. I
apologize because you were cutting out, but I do think that
what is really critical is to use the resources that Congress
gives us as best we can to lean in to ensure that we have a
full rendition of the facts of the case; use our industry bars;
and, yes, from time to time, as you said, to consider whether
to include that in a settlement. And, as you know, we also take
many cases to litigation and into the courts where that is not
the case, where in the courts, you find different things. The
court decides, and opinions are written.
Chairwoman Waters. Mr. Gensler, I don't know whether Mr.
Torres is still on the platform. It looks as if he dropped off.
Mr. Torres, can you hear me? I think something has
happened. I don't know if it is a technology problem, but--
Mr. Torres. Hello?
Chairwoman Waters. I think he is coming back now.
Mr. Torres, you may continue.
Mr. Torres. Chair Gensler, are you suggesting that resource
constraints make it impossible to settle cases without
requiring admissions of wrongdoing? I just want to be clear
about your position.
Mr. Gensler. I think that, as we have had in this lively
discussion, there are challenges and tradeoffs, and it is part
of why sometimes we take cases directly into the courts. What
you are highlighting, and I think we have a shared vision here,
is to use all of the tools that we have in our tool kit to
ensure that market participants stay on the right side of the
law. And that is at times taking things into the courts and
litigating them fully. Occasionally, that is also settlements.
It has been ensuring when we do settlements, if there is a full
rendition of the facts, that we also use industry bars, that
we, when appropriate, also have very serious undertakings by
those--
Mr. Torres. Mr. Gensler, I see my time is about to expire.
I just want to quickly ask you about stablecoins. Do you
consider stablecoins a systemic risk, because obviously, the
nature of stablecoins will determine the nature of regulation?
What is your conception of stablecoins? Is it securities or a
systemic risk?
Mr. Gensler. I would say this: We already have--oh, the
gavel is coming down.
Mr. Torres. Is it a systemic risk? Yes or no?
Mr. Gensler. I think the $125 billion of stablecoins we
have right now are like the poker chips at a casino, and I
think they create risk in the system that we have digital
lending, crypto lending, crypto trading that, yes, I do think
that if this continues to grow and it has grown about tenfold
in the last year, it can present those systemic risks.
Chairwoman Waters. Thank you. The gentleman's time has
expired.
The gentleman from Ohio, Mr. Gonzalez, is now recognized
for 5 minutes.
Mr. Gonzalez of Ohio. Thank you, Chairman Gensler, for your
time today. I also want to thank you for our time last week. I
thought it was a very good conversation. As I mentioned in our
call, I am extremely excited about the opportunities from
emerging blockchain technology for our economy and opening up
finance opportunities to the unbanked and underbanked.
Additionally, when I look at those who have done the best
financialing in the crypto space, it seems to be a much more
diverse set of players, which is completely unlike the
traditional finance world, that is almost exclusively dominated
by those who happen to have attended the best schools and have
the right pedigrees. This tells me that crypto is enabling
wealth creation opportunities in a way that the traditional
finance world simply has not been able to accomplish in many
respects.
Recently, we have seen a boom in DeFi products that give
individuals the power to lend, borrow, and earn interest
through the Ethereum platform, and somewhat on Solana, that far
exceed the zero percent rates that U.S. Treasuries provide. I
have been speaking with multiple companies in the space and the
common theme in these discussions is that they want to come in
and describe their product to the SEC. However, they are
concerned that these meetings could lead to a potential
enforcement action. They also see some of the comments, similar
to the ones you just made, about many of these products, in
particular, stablecoins, being the poker chip at a casino as
unnecessarily demeaning and suggesting there is a presumption
of guilt on the part of the SEC. And so, this sort of friendly,
open-door conversation is not something that they believe they
are experiencing.
I guess my first question--well, first, I want to start on
stablecoins. It seems to me that when you are thinking about
stablecoins and whether they are a risk or not, a lot of that
falls back on the quality of the reserves and what ultimately
backs up the stablecoin should be determinative in whether it
is a true stablecoin or it is a junk coin.
Would you disagree with that characterization? And, if so,
please explain why, if we agreed on what constitutes a high-
quality set of reserves, why that would, in effect, somehow
necessitate calling them a poker chip at a casino?
Mr. Gensler. Let me just comment on that last point. We
have regulations in many States of the land--Nevada started,
and New Jersey, but my home State of Maryland had to take this
up some 2 decades ago regulating casinos, and it ensured for
certain safety and protection for the public. I think that we
found our way through that set of public policy issues, and we
can find our way through this as well.
Mr. Gonzalez of Ohio. If I could really quickly on the
casino route--really quickly, Mr. Chairman, there is a key
difference between a casino and a DeFi product. In a casino,
you are guaranteed to lose 100 percent of the time. If you play
long enough, you will lose. The odds are against you, unless
you are cheating. That is not true in crypto. It is not true in
blockchain technology. But I will let you proceed.
Mr. Gensler. In terms of a number of these platforms, you
have tempted me in here, a number of these platforms are
saying, ``Come hither, and we will give you a return on your
crypto if you leave it with us, and we will give you staking
returns or lending returns.'' And often they are, as you said,
above what you can get in a money market fund or what you can
get with investment advisers.
Within a transparent way, how are people, sort of,
advertising 4 percent returns, 7 percent returns, sometimes up
to 21 percent returns on these crypto platforms? I think that
is what we are trying to do is to ensure that the public is not
defrauded and what stands behind those claims. In terms of
stablecoins, I do concur with you that there are different
types of coins. Wrapping something computer graphically around
fiat money could be different. It could be directly around
deposits at a bank, or, on the other end of the spectrum, it
could look a lot like a money market fund because it could be
like our money market funds around Treasuries, commercial
paper, certificates of deposit, and so forth.
So, it really depends on what the underlying assets are,
but I do think, as you have just said, that there is a way to
ensure the reserves are tightly and appropriately tied to the
banking system, but that might raise other issues because we
already have digital money in this country. We have for decades
had digital money. It is called digital bank deposits. So now,
the question is, what is stablecoins giving you more if they
are not just giving you a way to avert tax collection, tax
compliance, and anti-money laundering? And I do think a lot of
these stablecoins are--excuse me for saying it--they grew up
over the last 8 years inside of trading platforms around the
globe to avert anti-money laundering laws and tax compliance.
Mr. Gonzalez of Ohio. I see my time is up.
With that, I yield back.
Chairwoman Waters. Thank you.
The gentlewoman from Pennsylvania, Ms. Dean, is now
recognized for 5 minutes.
Ms. Dean. Thank you, Madam Chairwoman.
And, Chair Gensler, it is a pleasure to have you here
before us. Thanks for providing testimony to the committee to
discuss the priorities, the mission, and the needs of SEC. So,
to take a bridge from that conversation around resources and
your budget requests, I wanted to give you an opportunity to
talk about your budget requests. SEC is requesting a little
more than $2 billion in appropriations for Fiscal Year 2023, a
little more than an 8 percent increase compared to 2022. In
fact, the final statement in your written testimony says, ``As
more Americans are accessing the capital markets, we need to be
sure that the Commission has the resources to protect them.''
I agree with you completely. How we budget reveals our
priorities. With the amount of funds in your budget request,
will that offset the staffing level decreases that the SEC has
suffered since 2016, which I believe your Agency has reported
at about a 4 percent decrease, and what key areas of staffing
are needed with this budget request?
And I guess one final piece of that, I believe it is a
deficit neutral budgeting statement in terms of SEC budgeting,
if you could address that.
Mr. Gensler. Thank you for that. Yes, to go in reverse
order, we are, because under congressional authorities, the SEC
sets an annual fee on various securities transactions. And so,
from the point of view of the U.S. taxpayer, it is paid for, in
essence, by the market itself and the market transactions.
In terms of levels of staffing, we did work with the Office
of Management and Budget (OMB) on that 2023 request, but it
doesn't quite get--we had shrunk several hundred people or 200-
plus people since 2016, and this gets us just below where we
were in 2016. I would have preferred to have been asked to take
on an agency that had grown 4 or 5 percent and not shrunk 4 or
5 percent, and this doesn't quite get us above where we were 5
years ago. And this is a market that is continuing to grow.
The last thing I would say is technology. We spend, give or
take, $350 million a year on technology at the SEC, which is
probably what some of the big banks spend in a couple of weeks,
if you just take the numbers. That is one systemically
important bank or something like that. Certainly, most of them
spend more than that in a month, and so it is just the nature
of congressional appropriations. We are where we are. We have
asked for a bit more, but it doesn't quite get us to where we
would like to be.
Ms. Dean. Can you speak to the focus at the SEC as you, I
hope, staff up a focus on diversity across-the-board at all
levels of the SEC?
Mr. Gensler. It is a really important focus in terms of
recruiting people, but also promoting into the senior ranks. I
have tried to do my best with the handful of people that we
have hired, whether in my front office or as Division
Directors, but also to work with our Office of Minority and
Women Inclusion, and work with our senior officers every time
that we have a possibility of promotion, to really look across
the Agency. We are advertising externally and internally, and I
think that is important to allow people to have an opportunity
for those senior roles as well.
Ms. Dean. That is terrific. And, finally, we have spoken a
lot about the mission of investor protection. With the notion
and the spirit of the ultimate investor protection as we see as
inching toward this potential catastrophe in reaching the debt
ceiling, do you recommend a lifting or elimination of the debt
ceiling?
Mr. Gensler. Of course, I have to leave some of that to
Congress and the Executive Branch, but I would say this, as the
chairwoman asked me earlier in this hearing, I think as we get
within a couple of days--if, I should say, and hopefully we
don't--but if we get to a couple of days before that fateful
October 18th--my God, it is my twin brother's and my birthday.
What a fateful October 18th that would be.
Ms. Dean. Oh, dear.
Mr. Gensler. But as we get closer to that, I think we will
start to see fraying in the marketplace, and there are great
uncertainties if we actually defaulted on our debt, terrific
uncertainties because Treasuries are the base upon which the
rest of our capital markets stand. It is like saying, ``Let's
test the foundation of a house and let's make sure the
foundation of the house defaults, the rest of the house is
going to have problems.''
Ms. Dean. I wish you and your brother a happy birthday free
of this burden, and it is irresponsible that any Member of
Congress would want to walk us toward that brink.
And I yield back.
Chairwoman Waters. Thank you very much. The gentlewoman's
time has expired.
The gentleman from Tennessee, Mr. Rose, is now recognized
for 5 minutes.
Mr. Rose. Thank you, Madam Chairwoman and Ranking Member
McHenry, and thank you, Chair Gensler, for your testimony and
participation in today's hearing. I want to welcome you, again,
to the committee and to, once again, remind you that
historically, the SEC has administered the Federal securities
laws in a bipartisan fashion, and it is my hope that you will
continue that tradition, as I believe our securities laws are
not where they should be, in holding debates about climate
change or things like racial inequality.
Obviously, as we reviewed market events in January, we
restarted the conversation regarding payment for order flow.
Now, I am not necessarily in favor of banning payment for order
flow like the legislation that my Democratic colleagues have
proposed, and that you have said is, ``on the table,''
especially without the proper due diligence of studying its
benefits and costs. I know we have talked about payment for
order flow a lot in this hearing, but I feel like we haven't
gotten a lot of answers.
Chairman Gensler, in the previous hearing, you agreed with
me that transparency is key and said that your staff would be
examining payment for order flow. That was in May. In your
testimony, and throughout this hearing, you have said that you
have asked for staff recommendations over the last 5 months.
How far have they gotten in that examination, what were their
findings, and when can we expect a report from you and the SEC
on those findings?
Mr. Gensler. I thank you for that. If I can separate out in
terms of the January events, the staff of the Trading and
Market Division and the Division of Economic Risk Analysis have
put together a report, and shared it with the five
Commissioners, and through that Commission discussion, I would
anticipate we will have that report out shortly. Again, there
are five of us, so there is a little bit of moving around.
In terms of the broader public policy issues--because that
is just a report--I still share the view, that this is driven
by economics, what is best to make our markets most efficient
and whether it is, as you mentioned, payment for order flow or
other parts of the stock market, what is critical, I think, are
a couple of principles.
One is order competition, having my order compete with
yours. And most people don't realize, if you go to a trading
app or on your computer and you put a market order in, it is
not likely--in fact, it is highly unlikely that it will go to
the New York Stock Exchange or NASDAQ or a LIT stock exchange.
It is being bought by an internalizer and a handful of
internalizers. So, we are really looking at, is that the best
way to instill competition in this market and efficiency and to
address some of the inherent conflicts that can be in this
system?
Mr. Rose. In a hearing earlier this year, I asked one of
our witnesses what reforms he thought the SEC could implement
with respect to payment for order flow to increase transparency
for retail investors, and he suggested more granular 606
reports, specifically doing more to provide better public
transparency of best execution.
Is your staff looking into additional changes to these
reports? And, if so, what changes?
Mr. Gensler. I will use terms that I have used earlier.
That is on the table as well, sir, but I think that the
question is whether disclosure alone, by enhancing the
disclosure around payment for order flow, really will address
it. The United Kingdom, Canada, and Australia all have banned
payment for order flow. I know we have different markets,
different systems. We even have letters that we have gotten
over the years dating back over the last 20 years articulating
why it is not good for our system.
So, I asked staff to consider that but also to consider it
only in the context of the entire market structure in terms of
the exchanges and what they are paying on what is called,
``rebates.'' How do we look at what is called the National Best
Bid and Offer,'' because that is often what is used to measure
price improvement. Is it the right measuring stick or measuring
rod to look at?
Mr. Rose. I see my time is short. In a challenging global
economy, the strength of our capital markets is vital to long-
term economic growth, yet regulatory burdens and increasing
amounts of red tape prevents small business from thriving and
stifles American innovation. The advances we have seen over the
past decade in technology have improved the way Americans and
our businesses perform financial activities. Due to these
investments, we are seeing more investors who have historically
been left out, now active in the markets. We should not stand
in their way.
With that, Madam Chairwoman, I yield back.
Thank you, Chairman Gensler.
Chairwoman Waters. Thank you very much.
The gentlewoman from New York, Ms. Ocasio-Cortez, is now
recognized for 5 minutes.
Ms. Ocasio-Cortez. Thank you, Madam Chairwoman, for hosting
this hearing.
And thank you, Chair Gensler, for joining us today.
I want to take a few minutes to discuss stock buybacks.
During the pandemic, I and many others on this committee and
beyond introduced pieces of legislation either banning the
practice of stock buybacks or regulating them in a broad kind
of spectrum of possibility, and one of the issues that I had
brought up was actually banning the practice of stock buybacks
for any corporation receiving public assistance, essentially
getting bailed out, while also mandating workers be granted an
equity stake or the public being granted an equity stake in any
of those kinds of public buy-ins to those companies.
Now, I want to dig into this issue a little bit more. For
folks following this at home, would you say it is fair to
describe stock buybacks as the practice of a company using its
profit or margin to purchase shares of its own stock as opposed
to other uses of its margin like investing in raising wages,
research and development, et cetera?
Mr. Gensler. If I could just broaden it out, I think the
companies that use dividends and stock buybacks have made some
decision to send money out of the company to their shareholders
or to buy back their shares rather than investing. I think it
is usually a two-step process. One decision is whether to
invest, as you say, more in the factories, the innovation, and
so forth, or to send it out to shareholders, and then usually a
second decision on whether to do it through dividends or share
buybacks.
Ms. Ocasio-Cortez. Thank you so much, Chair Gensler. And
what we saw during the pandemic was that some of these same
corporations that spent about $6.3 trillion on stock buybacks
between 2010 and 2019, also denied their workers hazard pay and
personal protective equipment, claiming that it was too
expensive. On top of that, production of medical equipment that
was necessary during the pandemic was also delayed due to many
years of underinvestments, in part, in research and development
from these companies that were using some of their funds to
purchase their own stock instead.
Would you agree that stock buybacks make no real
contribution to the productive capabilities of a firm?
Mr. Gensler. Again, both dividends and stock buybacks are a
way that management and boards send money out of the company to
shareholders, and so there is, as you say, some tradeoffs
between that and what they are investing. Our role at the SEC
is to make sure that we bring transparency to these
considerations. Of course, those of you in Congress might
debate whether to change those rules, but we try to bring
transparency and ensure that there is not fraud or buybacks in
circumstances where the company has insider information and the
like.
Ms. Ocasio-Cortez. Thank you. President Reagan's SEC
adopted Rule 10b-18, which limits stock buybacks under certain
volume, broker, and timing conditions, although the amount that
a large company can spend on buybacks on a daily basis under
this rule is often in the hundreds of millions of dollars.
Conforming to these conditions allows a company entry to a,
``safe harbor.'' Does the SEC actively monitor whether
corporate buyback activity remains within its safe harbor?
Mr. Gensler. You raise a good point. It relates to earlier
debates about resources, but we try to use our resources across
the Agency to ensure compliance with the laws. I have asked
staff in terms of stock buybacks, could we also use some
authorities that were put in place under Dodd-Frank about the
disclosures--
Ms. Ocasio-Cortez. I apologize, Chair Gensler, but is that
a, ``no,'' due to resource issues that the SEC does not
actively monitor?
Mr. Gensler. It is more nuanced than that.
Ms. Ocasio-Cortez. Okay.
Mr. Gensler. We pursue, and we use the Enforcement and
Examination and Corporation Finance staff to look at what we
can, but there are 7,000 public companies in the United States.
Ms. Ocasio-Cortez. Understood. Would the SEC consider
rescinding Rule 10b-18 and issuing new guidance which clearly
states that corporations may be held liable for stock buybacks
that constitute potential market manipulation?
Mr. Gensler. I think it is clear right now that if it is
market manipulation, you can be held accountable. What I have
asked the staff to do is to look at this more broadly because
we have new authorities under Dodd-Frank to actually get more
transparency in this area as well.
Ms. Ocasio-Cortez. Great. Thank you very much.
Chairwoman Waters. Thank you.
The gentleman from South Carolina, Mr. Timmons, is now
recognized for 5 minutes.
Mr. Timmons. Thank you, Madam Chairwoman. And thank you,
Chair Gensler, for taking your time to be with our committee
today. Back in May, the Securities and Exchange Commission's
Small Business Capital Formation Advisory Committee made two
specific recommendations to you, not simply to stimulate
capital formation for new small businesses, but also to make it
easier for women- and minority-founded enterprises to raise
capital for their entrepreneurial endeavors. The advisory
committee noted that traditional institutional investors are
known for pattern matching or making investment decisions that
replicate patterns of who a successful entrepreneur has looked
like in the past, but, unfortunately, this often locks out
women and minorities, who are often different from
traditionally successful entrepreneurs.
The changes recommended by the advisory committee were:
number one, increasing the cap on the aggregate amount of
capital contributions in uncalled committed capital from $10
million to $150 million; and number two, increasing the
allowable number of investors or beneficial owners from 250 to
600 for qualifying venture capital funds.
Following their recommendations, I introduced the Improving
Capital Allocation for Newcomers Act of 2021, or the ICAN Act,
which would codify these recommendations. We all know capital
is the life blood of all businesses, but especially so for
small businesses in their formative stages.
Chairman Gensler, would you support codifying these
recommendations, increasing the aggregate amount of capital
allowed from $10 million to $150 million and increasing the
allowable number of investors from 250 to 600 for qualified
venture capital funds that your advisory committee made?
Mr. Gensler. I would want to take a look at your
legislation, sir, and try to work with you on it. I think that
there is a balancing act in all of these as to, how do we
ensure that investors get the appropriate disclosure, whether
it be in a venture capital fund or otherwise? And it is
important that investors get that disclosure, but I look
forward to working with you and to looking at your legislation
more specifically.
Mr. Timmons. I really appreciate that, and I look forward
to working with you as well. We will get you a copy here after
this hearing.
I want to end my time by responding to some of the comments
that Chairwoman Waters made in her opening statement today
regarding the debt limit. She said that the Republicans are
insisting on a debt default, and that we are playing a
dangerous game of chicken. Two things are obvious here: First,
no one wants a default; and second, if there is a game of
chicken going on, it takes two to tango. Yesterday, President
Biden said that Republicans refusing to raise the debt limit
for him was hypocritical, dangerous, and--this really got me--
disgraceful. I find that statement to be the height of
hypocrisy since then-Senator Biden voted against raising the
debt ceiling 3 times during the George W. Bush Administration
in 2003, 2004, and 2006--3 separate times.
The Republicans' position on raising the debt ceiling has
been clear for months now. If Democrats want to spend trillions
of dollars on their reckless tax and spending spree in a
partisan manner, then they should have to raise the debt
ceiling in a partisan manner as well. They have completely
rejected us as governing partners from the time President Biden
was sworn in up until now, when they want to raise the debt
ceiling. This is not how that works. Congress has raised a debt
ceiling through reconciliation before; it can do it again. Just
last week, the Senate Parliamentarian laid out the process for
doing so.
Republicans will not be complicit in the Democrats sprint
towards socialism in America. If we default in a few weeks,
there will be no one to blame except the unified Democratic
government in the White House and Congress. They control both
Houses of Congress and the Executive Branch. They will own this
default if it happens, but I don't think it will. I do believe
the Democrats will come to their senses and use reconciliation
to get this done.
The only reason Democrats in Congress have not already gone
down the path of reconciliation is because they know it will be
a tough vote since, when using reconciliation, they will have
to specify the exact dollar amount they want to raise the limit
instead of simply suspending the debt limit for a period of
time. Admittedly, that is a tough vote. No one wants to be on
the record voting to raise a debt limit by several trillion
dollars, and if my Democrat friends are going to pass this
reckless tax and spending spree, that is exactly what they will
have to do. I just hope my friends figure out exactly how much
money they are going to spend on this thing soon because I
would hate for them to not raise the debt limit high enough and
find themselves in the same position, again, in a matter of
months when the bill comes due.
With that, Madam Chairwoman, I yield back.
Thank you.
Chairwoman Waters. Thank you very much.
The gentleman from Illinois, Mr. Garcia, is now recognized
for 5 minutes.
Mr. Garcia of Illinois. Thank you, Madam Chairwoman.
And good afternoon, Chairman Gensler. Thank you for joining
us. I represent a working-class district in Chicago. Many of my
neighbors lost their jobs during the COVID-19 pandemic and many
lost their businesses. But, so far, we have avoided a financial
crisis. That wasn't luck. That comes from the robust
protections that Congress put on our banking system with Dodd-
Frank and active intervention from our regulators, but we
aren't safe yet. People in my neighborhood still worry about
losing their homes, but the stock market and cryptocurrency
markets are slinging up and down. You can see the instability.
For instance, with respect to stablecoins, they are valued
at nearly $70 billion, but they are bigger than that. They make
up a tremendous part of the market for cryptocurrency, and the
same investors who buy cryptocurrency are in the stock market,
which affects our whole economy. We know the risks are there,
and it is up to us to protect our markets because my
constituents can't afford another financial crisis.
Chair Gensler, are you worried that stablecoins might pose
a systemic risk to our economy, and is that something that the
Financial Stability Oversight Council (FSOC) is looking into?
Mr. Gensler. Thank you. I think that my colleague, my good
friend, Secretary Yellen is leading this, and we are looking at
stablecoins right now in terms of a number of matters. You
asked whether it could impinge upon financial stability. We are
also looking at how it relates to guarding against illicit
activity and investor protection.
And I think there are issues in all three buckets, not just
financial stability. There is about $125 billion of these coins
right now. There are four or five big ones, and those coins are
intertwined in a crypto trading system where, while they are
only about 6 or 7 percent of the market value of
cryptocurrencies, they represent probably three quarters or 80
percent of all of the transactions in crypto versus a
stablecoin. That is why I said it is like the poker chip at the
gaming tables, but they are used to buy and lend other
cryptocurrencies. The other thing is, it has grown about
roughly tenfold in the last 15 months, so you could see where
it could start to undermine things if it continues to grow, to
undermine traditional banking payment systems if it is not
brought inside of the remit of banking, and also undermine some
of that which we do in investor protection at the CFTC and the
SEC.
Mr. Garcia of Illinois. Thank you for that. And, as we have
seen to the south of us in El Salvador, with President Bukele's
announcement that he would make Bitcoin a national currency
last month, thousands of people took to the streets of the
capital to protest this move as dangerous and unconstitutional.
Given the volatility that we have seen in Bitcoin prices, it
seems to me like a risky move.
Mr. Gensler, you have seen how much the price of Bitcoin
moves in response to announcements from U.S. regulators. Do you
think speculation and regulatory arbitrage are important
drivers in the price of Bitcoins?
Mr. Gensler. Bitcoin, which was the first cryptocurrency
based upon Satoshi Nakamoto's paper in the middle of the
economic crisis in 2008, is a highly-speculative asset, but it
is a stored value that people wish to invest in, as some have
invested in gold since antiquity, but I think you are also
right that it is used, not just Bitcoin but other
cryptocurrencies, stablecoins, as you said, as arbitrage
between regulatory regimes. I think that is why stablecoins and
cryptocurrencies became intertwined, frankly, to avoid another
digital type of money, and it is called the U.S. dollar. The
U.S. dollar is a digital form of money. We already have digital
money, but this has been used in part for these other reasons.
So, it is a speculative store value, yes, Bitcoin. Many of
these 5,000 or 6,000 other projects are also weighed to raise
money, and they are digital investment contracts depending upon
the facts and circumstances, and they are a way to arbitrage
some of our rules.
Mr. Garcia of Illinois. Thank you.
Madam Chairwoman, I yield back.
Chairwoman Waters. Thank you very much.
The gentleman from New Jersey, Mr. Gottheimer, who is also
the Vice Chair of our Subcommittee on National Security,
International Development and Monetary Policy, is now
recognized for 5 minutes.
Mr. Gottheimer. Thank you, Madam Chairwoman.
And thank you, Mr. Gensler, for being here today. We heard
Federal Reserve Chairman Jerome Powell testify how the Fed was
not seeking to ban stablecoins and other cryptocurrencies, even
as they continue to examine the potential creation of a central
bank digital currency. You previously stated how stablecoins
could be treated as securities, and criticized them as poker
chips, as you referred to them several times today.
Given your skepticism, how do you envision stablecoins
being integrated into the broader U.S. financial system,
particularly the digital payment space? And what do you feel
should be the SEC's role in this process?
Mr. Gensler. It is good to see you again, Congressman.
Thank you. Look, even poker chips in a regulated environment
are a good thing. Poker chips at a casino do serve a purpose
that provides greater transparency at the gaming table, and
they even lower the security risk about money being stolen at
the casino. I just want to caution, I am saying how it is being
usedeconomically. I think working with our colleagues across
the President's Working Group, we are going to come up with
some recommendations, but I do think, to the extent that a
stablecoin is directly tied to deposits, cash in a bank, and it
is one to one, and it has clear and clean reserves, that type
of digital payment system, if that is all it is, then we can
put banking remit around it.
I think that many of these, at the other end of the
spectrum, might be investing in securities, and they start to
take on characteristics like money market funds or others, and
we have had some challenges, particularly since money markets
are larger, about instability in money markets when there are
kind of stressed periods and runs on money markets during
periods of stress. We wouldn't want to move that type of
instability into these stablecoins.
And then, lastly, yes, I think they have been used inside
the trading platforms and lending platforms--crypto, that is.
They have been used, in part, to avert laws around tax
compliance and illicit activity.
Mr. Gottheimer. Thank you, Mr. Chairman.
I have opposed the concept of a financial transaction tax
in the past, particularly because of the potential negative
impacts on the U.S. as a leader in the financial industry,
including many businesses that are in my district.
In March of this year, you stated in your written follow-up
to the Senate Banking Committee that you have not previously
studied any current proposals for imposing a financial
transaction tax. I would just like to ask if you have any
follow-up to that statement, and also inquire if you have any
thoughts on how financial transaction tax might negatively
impact the broader U.S. economy and our leadership in this
space?
Mr. Gensler. I haven't had occasion to study more. As you
are probably aware, we are an Agency of about $2 billion a year
that is funded by securities fees, transaction fees, and at
that level, the $2 billion to fund the Agency, I think has
worked smoothly in the markets. But I haven't studied anything
that would be--of course, the debates have been about something
much larger than that.
Mr. Gottheimer. I am eager to hear back from you when you
spend some time with it. And it is always good to see you.
Thank you for your leadership, Mr. Chairman.
Mr. Gensler. Thank you. I hope you and your family are
staying well during these times.
Mr. Gottheimer. You too, sir. Thank you.
I yield back.
Chairwoman Waters. Thank you very much.
The gentlewoman from Michigan, Ms. Tlaib, is now recognized
for 5 minutes.
Ms. Tlaib. Thank you so much, Madam Chairwoman. I am so
sorry I had to do this in the car like this. Thank you so much
for holding this important hearing. As you know, I have been
incredibly passionate about accountability and especially,
Chairman Gensler, I am very alarmed, as you all know, about the
recent disclosures, if you haven't watched some of my comments,
regarding several Federal Reserve officials who have made
transactions during the pandemic that I believe violated the
Fed's ethics guidelines and may have violated the law.
As you know, in February 2020, Fed Vice Chair Clarida
traded between $1 million to $5 million out of a bond fund into
stock funds. The next day, as you may know, Mr. Chairman, Fed
Chair Powell issued a statement on the pandemic that was, ``the
first step in a wide-ranging central bank rescue that would
ultimately push up stock prices.'' We also learned that Robert
Kaplan, the president of the Dallas Fed, and Eric Rosengren,
the president of the Boston Fed, made major transactions
involving securities and markets supported by the Fed during
COVID. The Fed's own ethic guidelines state that officials
should avoid, ``even an appearance of conflict between the
personal interest, the interest of the system, and the public
interest.''
I want to ask you: These trades don't have, ``the
appearance of a conflict''; in my opinion, they are a conflict
of interest. Chair Gensler, are you aware of these three
instances, and is the SEC looking into these transactions as
potential insider trading?
Mr. Gensler. Congresswoman, I hope I can speak to this in
the generic, because it wouldn't be appropriate to speak about
any individual circumstance, but we at the SEC have a broad
remit, and it is one that you have put in place in Congress
that we would pursue what is known as trading on material,
nonpublic information, whether people are at a company or even
if people are within other agencies, and we have done so in the
past. We will continue to do so in the future to help protect
the integrity of the markets.
Ms. Tlaib. Chairman, so do you need an official letter from
me to ask you to look into something? What do you need from me
or from others? I know Senator Warren has been very public
about some of the concerns, and I am telling you, the American
people are very angry--it is [inaudible] where, again, they are
in the position of public trust and folks are using that
position for their own personal interests.
Mr. Chairman, tell me what I need to do so I can get a,
``yes,'' answer, that you are looking into these three
instances?
Mr. Gensler. Let me be precise. We, as an Agency, look into
things that are brought to our attention on many matters, but
we are not allowed, in this setting or in other settings, to
say that we are investigating or are not investigating
something. That is the thing that protects the public as well.
But I want to say, generally speaking, whether somebody is in
the government or outside of the government, one is not to
trade on material, non-public information, and that is what our
laws are about.
And we pursue those. We have pursued them in the past when
there have been members of the administrative or official
sector, as well as even occasionally State and local actors in
the official sector.
Ms. Tlaib. Okay. Let me ask you in a different way. Would
prohibiting government officials like Members of Congress, the
President, or members of the Board of Governors from holding or
trading individual stocks limit conflict of interest and
potential insider trading?
Mr. Gensler. I think that as a policy matter, Congress took
up--at least Members of Congress, in an Act 8 or 10 years ago,
if I remember correctly, that taking it up more broadly could
help instill greater confidence in this. We are going to do
what we do at the SEC, and do well, with regard to holding
people to our laws as you would want, but Congress could do
even more. There is public transparency that Congress has
already put in place, public transparency that those of us in
the official sector have to file--
Ms. Tlaib. --by the time they file, we find out there was
some conflicts or some obviously--that is the thing. Chairman
Gensler, I want transparency in people filing. I am always
about complying with that, but then what happens afterwards? We
don't find out that they were held accountable, and then it
continues and really taints our process to the point where
people don't trust us anymore. And the chairwoman knows how
incredibly passionate I am about this, but I don't think we
should be allowing public officials to be trading stock,
period. And, if you are going to be put in this position, that
is a sacrifice you are going to have to make, because it is
about the public's trust.
And so I just appreciate--I hope it is relayed, but I do
appreciate you coming before the committee, but I hope you do
go back to your team and let them know that this Member from
Michigan is very concerned in the hopes that you are
investigating these three instances. Thank you.
I yield back.
Chairwoman Waters. Thank you very much.
The gentlewoman from Texas, Ms. Garcia, who is also the
Vice Chair of our Subcommittee on Diversity and Inclusion, is
now recognized for 5 minutes.
Ms. Garcia of Texas. Thank you, Madam Chairwoman.
And thank you, Chairman Gensler, for being here with us
today, and the end is in sight, the end is in sight. Thank you
for your patience and your perseverance with us today. I
appreciate the great work you have done so far in leading the
SEC back in the direction of strong investor protection. The
issues presented by crypto assets in stablecoins are far
ranging, and while these discussions are evolving continually
and there has been much discussion today, of course, I wanted
to get some insight on how you and your colleagues at the SEC
are framing the discussion.
As of yesterday, The Block reported that the total
stablecoin market is estimated to be worth $127 billion--I
think you mentioned that--compare this between 2017 and 2019
when the stablecoin market grew from $10 million to $5 billion.
So, it has skyrocketed, as you noted, in the last couple of
years. Despite the intricacies of stablecoins and their
proposed merits, it is absolutely imperative that we recognize
the systemic significance of this to the market.
Chairman Gensler, in your August 5th letter to Senator
Elizabeth Warren, you stated, ``In my view, the legislative
priority should be center of crypto trading, lending, and DeFi
platforms. Regulators would benefit from additional plenary
authority to write rules for and attach guardrails to crypto
trading and lending. ''
Could you discuss a couple of examples of legislative
measures you have in mind for protecting the financial
sovereignty of our markets, particularly as it pertains to
stablecoins?
Mr. Gensler. As it pertains to stablecoins, I think that
they have provided an alternative way to trade on these trading
platforms, and they are intertwined inside of crypto trading
around the globe. They initially came along around 8 years ago,
frankly, so that not only to be efficient, but also to avoid
some of the overseas--some of the anti-money laundering
protections that were around the globe when these trading
platforms were unable to get bank accounts at various banks
around the globe.
I think they have evolved now to be at the center of the
trading and lending platforms and that it would be really
helpful to work with Congress around these. Again, at one end
of the spectrum, it might just be something digital around the
digital dollar. Remember, we already have a digital dollar. It
would be sort of misleading to say we don't, but this is
something, an additional digital wrapper around the digital
dollar, and the question is, what does it provide and how do we
protect the public still for tax compliance, anti-money
laundering, and financial stability?
At the other end, they start to look like money market
funds and how do we, the SEC, protect the public for investor
protection and the like. I think that there is a range of these
different coins, and even if they are all the way over on one
end, we have to protect the public in terms of these, guarding
against solicitous activity, tax, and financial stability. And,
lastly, I do think that the platforms, the lending platforms,
the crypto trading platforms where there are 5,000 or 6,000
other cryptocurrencies, non-stablecoins, so to speak, are
highly volatile, speculative, usually investment vehicles, we
need to get our arms around that.
Ms. Garcia of Texas. Thank you. I want to shift gears a
little bit, too. I think you characterized it as human capital
in your written remarks, and this committee has been advocating
for the creation of Offices of Minority and Women Inclusion
across all financial regulators. In 2018, the SEC asked almost
1,500 of those entities regulated by the SEC to complete a
voluntary diversity assessment. Only 5 percent responded to the
request and submitted data.
What are you in, the OMWI Office, doing to increase
participation? Have you considered making these assessments
yearly and mandatory or using some other inducement to
encourage greater participation in these assessments?
Mr. Gensler. Thank you for flagging that, and I do think
that we could do better than the 5 percent, but what--we would
have to sort of encourage and--shall we say--make it easier to
participate. Separate from that, because that initiative is
really important, but separate from that, we are also looking
at investor demand to know more about the work forces of
American companies or listed companies. This includes many
overseas companies as well listed here. And in those
disclosures, I have asked staff to consider whether we should
also have this disclosure of the forms that are shared with the
Department of Labor, the EEO1 diversity disclosure forms--
Ms. Garcia of Texas. I am familiar with that. I have worked
at the EEOC before, but would you consider doing them yearly
rather than every other year?
Mr. Gensler. I like that suggestion. Could I get back to
you and work with staff and see because--
Ms. Garcia of Texas. You are breaking up.
Chairwoman Waters. Thank you very much.
The gentlelady's time has expired.
Ms. Garcia of Texas. Madam Chairwoman, he froze there for a
minute. I didn't get his response clearly.
Chairwoman Waters. Yes. You are way over time.
Ms. Garcia of Texas. Okay. Thank you.
Chairwoman Waters. Will you please follow up in writing?
Ms. Garcia of Texas. Yes, ma'am. I will.
I yield back. And I apologize.
Chairwoman Waters. Thank you. The gentleman from Texas, Mr.
Taylor, is now recognized for 5 minutes.
Mr. Taylor. Thank you, Madam Chairwoman.
Can you hear and see me?
Mr. Gensler. I can see you, and I can see the Texas flag.
Mr. Taylor. Okay. Thank you, Mr. Chairman. I appreciate
this hearing, and the opportunity for us to discuss important
issues, and I had wanted to talk about crypto, but I think that
has been covered very well by my colleagues. So, I will skip
ahead.
In your opening remarks, you talked about the use of
artificial intelligence (AI) and machine learning in the
markets. Did I hear you correctly that you are using it at the
Securities and Exchange Commission presently?
Mr. Gensler. We have a really good analytics group, but I
would say our use of machine learning is limited compared to
the capital markets, which are really using them increasingly
to even follow a hearing like this. Everything that we are
saying could be followed by artificial intelligence for
sentiment analysis and, depending upon how you or I speak,
could be fed into the computers and to see whether markets move
up or markets move down.
But we have a very limited, at this stage, in 2021. I hope
to do better in the future.
Mr. Taylor. Are you using AI, and machine learning, in your
stock watch, in your anti-insider trading efforts?
Mr. Gensler. We are using data analytics, which I would
rather not discuss in public, the data analytics we use. But I
would say that we are at this stage, frankly, behind the
capital market participants, the high-frequency trading shops,
the big asset managers and their use of sophisticated data
analytics like machine learning.
Mr. Taylor. And the reason I ask this is that I was
actually in New York yesterday--and of course, I am back in
Texas today--meeting with Bloomberg. And they have an
incredible data analytics operation in the valuation of bonds.
And they are doing that as a market service, actually
selling their service in terms of valuing bonds. And they have
150 people working around the clock trying to value bonds, and
they are tweaking a machine, AI, to figure out what is the
proper value for a bond.
And it seems to me that there are some applications for AI
within the Federal Government. I think the Securities and
Exchange Commission comes to mind.
Have you given any thought to where you think you could
expand the efficiency of your operation at the Securities and
Exchange Commission, whether it is at stock watch? That is what
comes to my mind, is the anti-insider trading operation where
you are trying to track a tremendous [inaudible].
Mr. Gensler. I think that there are multiple places. And I
am sort of a finance person, a markets person, but I had this
opportunity at MIT for a few years, and I really studied this
more closely.
I think we could use it not only in market surveillance,
which is actually what you are talking about, market
surveillance, but also throughout our examination, and
potentially enforcement, where we can look at troves of data to
look at patterns.
What machine learning, what artificial intelligence is so
good at is extracting patterns from data and finding those
patterns in market surveillance or in other examination. And
right now many--Bloomberg, as you mentioned--but many market
participants are using it and using it to basically maximize
their returns.
I think we have a second thing at the SEC that we are
looking at, which is how are platforms using it to engage with
the public, and are they optimizing their revenues based upon
the data, whether it is social media or elsewhere, but are they
optimizing for their revenues?
If they are optimizing for our engagement, that can be a
positive, but it also can raise some conflicts if they are
maximizing for their revenues rather than for the public's
investment returns.
Mr. Taylor. Sure, Chair Gensler. I look forward to working
with you to identify areas where you can modernize the SEC, use
AI, artificial intelligence, machine learning, to find better
ways to do your job. Whether it is high-frequency trading,
finding irregularities within markets, I think that is an
important opportunity.
And as you have so eloquently pointed out during this
hearing, we enjoy the greatest capital markets in the world,
and I think having a sophisticated SEC that is prepared to do
its job and make sure that they have advanced tools to go do
that only makes sense.
With that, Madam Chairwoman, I yield back.
Chairwoman Waters. Thank you very much.
The gentleman from Massachusetts, Mr. Auchincloss, who is
also the Vice Chair of the committee, is now recognized for 5
minutes.
Mr. Auchincloss. Thank you, Madam Chairwoman.
And Chair Gensler, I appreciate your thoughtful answers and
your persistence today. You are almost done.
You have been very clear in your written and in your verbal
testimony that you want to bring crypto into the basic bargain,
as you describe it, where investors get to make their own
decisions about how much risk they take on, and companies have
to report consistent and decision-useful information. You want
to bring crypto into that bargain.
You have also been clear that you think most of the major
crypto players have at least some elements of their businesses
that are securities and should operate on that default
assumption, and that you would like each of these crypto actors
to be coming to speak with the SEC on a one-on-one basis to get
feedback from you, and also, I think from what you have said,
to give you feedback on what kind of regulations make sense.
I think everything that you have outlined sounds like a
reasonable way to approach a nascent, promising industry. I
think we are reaching a tipping point, though, where we need
more stable, broad-based law that does not require a phone call
with the Chairman of the SEC, but that a startup with their
counsel can understand the risks that they are getting into
from a regulatory perspective. And so, from that end, we need
Congress to act.
My question to you is, would it be most helpful for
Congress to create and delineate a new class of security that
had a separate regulatory apparatus, or would it be most useful
for Congress to divide explicitly crypto assets between the
CFTC and the SEC?
Mr. Gensler. I think, actually, the laws are pretty clear
with regard to these and that those entrepreneurs and their
lawyers could look. And they don't even have to squint. They
can look. The Supreme Court has really said what is an
investment contract.
In terms of your question, I think that between the CFTC
and SEC, we have good authorities. Chair Behnam and I have been
talking a lot about how we can coordinate better.
I don't think there is a need to set something new up, but
I do think that if something is a security, people have raised:
Well, but can we follow everything that was written for
traditional bonds and stocks?
And so, we want to hear that. We want to think about that,
and Congress would probably want to think about that as well.
I would add a cautionary note: If Congress were to carve
something out of the securities law, it could also undermine 90
years of economic success and undermine the 7,000-plus issuers
now who would say, well, wait a minute, there is regulatory
arbitrage. Somebody else is raising money in the capital
markets, operating like a security, but they have a different
regime.
Mr. Auchincloss. I fear that, but then I guess I would come
back to you, because I have been listening this whole hearing,
and I haven't really heard an ask from you about what Congress
can do to make your job easier as it comes to regulating
crypto.
I think you and I are in agreement that we need to regulate
crypto. I agree with you just intuitively that a new regulatory
agency doesn't sound like it makes a whole lot of sense. I
believe you that a lot of the law is settled if entrepreneurs
and their counselors would examine it in good faith. But there
clearly are gray areas, and businesses, and especially
investors, don't like uncertainty. They deserve some certainty.
So, how can we help you?
Mr. Gensler. Let me raise two areas, I think.
One is with regard to stablecoins, the stablecoins that are
all the way over this end that are really just investing in
cash, not operating more like a money market fund.
I know, and I let them speak for themselves, but my
colleagues, the bank regulators, think there is more that we
can do with Congress' help on that end of the spectrum in terms
of stablecoins. Even the ones that are all the way over and
operating more like money funds have to be taken into
consideration.
I think in terms of working with the CFTC and the SEC, we
have robust authorities over exchanges, over somebody that is
trading securities on their platforms. The CFTC does not. They
are a derivatives regulator, but they have enforcement
authorities over commodities.
What happens when we have a platform that has a few
commodities but mostly securities on it and the coordination
between the two of us and that oversight, and also authorities
in that regard? There are many, I would say, secondary and
third-level issues as well.
Mr. Auchincloss. I appreciate that.
And then, just a final point before I run out of time, we
have heard some colleagues on the Republican side of the aisle
talk about ESG investing, and they are worried that it is
getting politicized. I think one of them mentioned the debate
about climate change.
I would just say for the record that there is a debate
about climate change to the extent that there is a debate about
evolution by natural selection. You can debate it, but the
science is clear. And I think what your Agency is doing by
making ESG more transparent and market actionable is important
and should be continued.
Madam Chairwoman, I would like to yield back my time. And I
would like to request unanimous consent to include in the
hearing record a letter from the Investment Adviser Association
and the National Association of Personal Financial Advisors.
Chairwoman Waters. Without objection, it is so ordered.
Thank you very much.
Are there any Members on the platform who were not
recognized because of their absence early on, and they have
returned now?
If not, I would like to thank our distinguished witness for
his testimony today.
And without objection, letters from the North American
Securities Administrators Association, the Council of
Institutional Investors, the California Public Employees'
Retirement System, and the Consumer Federation of America will
all be included in the record.
Without objection, it is so ordered.
The Chair notes that some Members may have additional
questions for this witness, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to this witness and to place his responses in the record. Also,
without objection, Members will have 5 legislative days to
submit extraneous materials to the Chair for inclusion in the
record.
I ask Chair Gensler to please respond as promptly as you
are able.
I would also like to thank Chair Gensler for the time that
he has given to us today and for the way that he has shared
information that has been so important to all of our Members.
Mr. Gensler. Thank you, Madam Chairwoman.
Chairwoman Waters. And I thank you all so very much.
This hearing is adjourned. Thank you.
[Whereupon, at 4:07 p.m., the hearing was adjourned.]
A P P E N D I X
October 5, 2021
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