[Senate Hearing 117-748]
[From the U.S. Government Publishing Office]
S. Hrg. 117-748
OVERSIGHT OF THE U.S. SECURITIES AND
EXCHANGE COMMISSION
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED SEVENTEENTH CONGRESS
SECOND SESSION
ON
EXAMINING OVERSIGHT OF THE U.S. SECURITIES AND EXCHANGE
COMMISSION
__________
SEPTEMBER 15, 2022
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Available at: https: //www.govinfo.gov /
__________
U.S. GOVERNMENT PUBLISHING OFFICE
53-618 PDF WASHINGTON : 2023
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
SHERROD BROWN, Ohio, Chairman
JACK REED, Rhode Island PATRICK J. TOOMEY, Pennsylvania
ROBERT MENENDEZ, New Jersey RICHARD C. SHELBY, Alabama
JON TESTER, Montana MIKE CRAPO, Idaho
MARK R. WARNER, Virginia TIM SCOTT, South Carolina
ELIZABETH WARREN, Massachusetts MIKE ROUNDS, South Dakota
CHRIS VAN HOLLEN, Maryland THOM TILLIS, North Carolina
CATHERINE CORTEZ MASTO, Nevada JOHN KENNEDY, Louisiana
TINA SMITH, Minnesota BILL HAGERTY, Tennessee
KYRSTEN SINEMA, Arizona CYNTHIA LUMMIS, Wyoming
JON OSSOFF, Georgia JERRY MORAN, Kansas
RAPHAEL WARNOCK, Georgia KEVIN CRAMER, North Dakota
STEVE DAINES, Montana
Laura Swanson, Staff Director
Brad Grantz, Republican Staff Director
Elisha Tuku, Chief Counsel
Dan Sullivan, Republican Chief Counsel
Cameron Ricker, Chief Clerk
Shelvin Simmons, IT Director
Pat Lally, Hearing Clerk
(ii)
C O N T E N T S
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THURSDAY, SEPTEMBER 15, 2022
Page
Opening statement of Chairman Brown.............................. 1
Prepared statement....................................... 40
Opening statements, comments, or prepared statements of:
Senator Toomey............................................... 3
Prepared statement....................................... 41
WITNESS
Gary Gensler, Chair, U.S. Securities and Exchange Commission..... 5
Prepared statement........................................... 43
Responses to written questions of:
Senator Toomey........................................... 56
Senator Warren........................................... 77
Senator Sinema........................................... 79
Senator Ossoff........................................... 84
Senator Warnock.......................................... 87
Senator Crapo............................................ 89
Senator Scott............................................ 91
Senator Tillis........................................... 94
Senator Kennedy.......................................... 100
Senator Hagerty.......................................... 102
Senator Daines........................................... 104
Additional Material Supplied for the Record
Letter submitted by National Association of Manufacturers,
Securities Industry and Financial Markets Association, and U.S.
Chamber of Commerce............................................ 108
(iii)
OVERSIGHT OF THE U.S. SECURITIES AND EXCHANGE COMMISSION
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THURSDAY, SEPTEMBER 15, 2022
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:02 a.m., via Webex and in room 538,
Dirksen Senate Office Building, Hon. Sherrod Brown, Chairman of
the Committee, presiding.
OPENING STATEMENT OF CHAIRMAN SHERROD BROWN
Chairman Brown. The Senate Committee on Banking, Housing,
and Urban Affairs will come to order.
Today's hearing, as usual, is in the hybrid format.
Witnesses are in person. The witness, Mr. Gensler, nice to see
you, Chair. Our witnesses are--Members have the option to
appear in person or virtually.
Welcome back, Chair Gensler, to this Committee.
Workers and their families do not measure the economy by
the stock market; neither should we. It is why in the Senate
and in the still new Biden administration we work to create an
economy that delivers results for people who get their incomes
from a paycheck, not an investment portfolio, raising wages and
good-paying jobs, and lowering costs. It means fighting the
corporate price gouging that so often hurts consumers and the
unfair labor practices that so often hurt workers. It means
investing in American manufacturing and the workers and farmers
who drive it. It means making sure our financial watchdogs keep
our economy and our markets stable.
At the SEC, that includes going after companies that try to
cheat the market. Chair Gensler is doing that very well. It
means strengthening corporate disclosures to stay ahead of
risks like climate change. It means looking into the practices
of private equity and hedge funds as they stretch their
tentacles into more and more areas of our economy.
It has been an eventful year. This summer, the Senate
confirmed President Biden's two nominees to the SEC. I know
both new commissioners got right to work on the many issues
before this Agency and the Commission and its dedicated staff
have been busy.
Republicans on this Committee have bellyached, and I assume
will today, about your ambitious agenda. If Wall Street and its
allies are complaining, it tells me you are doing your job. You
put America's savings first. You focus on transparency and
fairness, two concepts critical to making sure our markets work
for everyone, not just insiders, not just corporate execs.
The SEC must continue making enforcement a priority. Bad
actors are always coming up with new schemes to separate people
from their hard-earned money or to cheat the rules to gain a
little bit more for themselves. Under your watch, SEC has
increased prosecution for insider trading which, as of course
you know, under the Trump administration had fallen to the
lowest level in a generation.
In April, this Committee considered a Reed-Menendez bill
that would outlaw insider trading in statute. The House has
already passed a similar bill; the Senate must. Last month, we
saw the successful results of bipartisan work of our Committee
Members to improve transparency and fight fraud.
In 2020, Senator Kennedy, who is sitting to my left, more
or less, and Senator Van Hollen pushed for the passage of the
Holding Foreign Companies Accountable Act, a bill to stop the
U.S. Stock Exchange trading of foreign companies with China
based auditors that refused to comply with our oversight laws.
Because that law jumpstarted negotiations, the Public Company
Accounting Oversight Board signed an agreement with Chinese
authorities that will, finally, allow auditors to begin
inspections.
In March, the President signed an Executive order
establishing a whole-of-Government strategy for digital assets.
While agencies across our Government look at how we respond to
the growth of crypto and best protect Americans' money, we know
the SEC continues to enforce the laws, going after cryptotokens
that violate security laws, shutting down crypto Ponzi schemes,
charging insider trading crimes in crypto.
Over the last year in the Banking, Housing, and Urban
Affairs Committee, we have looked at how crypto assets are used
in scams and frauds and play a role in illicit finance. We
heard from the Treasury Under Secretary who testified on the
President's Working Group report on stablecoin.
This morning, the Ag Committee downstairs and Senator Smith
and I on this Committee, on the Democratic side, sit on both of
these Committees is considering a crypto bill sponsored by
Senators Stabenow and Boozman that focuses on digital
commodities. I appreciate their work to create regulation in
the crypto space.
It is critical, though, that we are careful and deliberate
in drawing jurisdictional lines. In this kind of regulation, we
have to prevent gaps and close loopholes that can be exploited
or abuse. It is not easy. It is why action by the Agriculture
Committee and the Commodity Futures Trading Commission Agency,
Chair Gensler is very familiar with, why that action is
welcome, but we also know it is not enough.
When Congress wrote Dodd-Frank, we fixed the problems in
the oversight of the over-the-counter derivatives market. It is
a lesson we need to remember, thinking of the damage that was
done prior to when it comes to crypto. Our regulators need to
work together to make sure investors and consumers and market
stability come first.
SEC's work on climate risk disclosure is an important
example of how to improve the market's understanding of risk
and to provide transparency and comparability. Clarity and
uniformity are key. If only a subset of companies provides
disclosure and they do so in whatever form they want, that does
not serve anyone. Investors outside the U.S. already benefit
from standardized climate risk disclosure. It is time the U.S.
market did as well.
SEC's recent rule proposal to require more disclosure about
corporate stock buybacks will also bring much needed
transparency to the market. Thank you for that.
We know stock buybacks are a big problem. They distort the
market. They funnel profits to executives at the expense of
long-term investment in workers and in innovation. The process
allowed for these buybacks has only made them more
manipulative. For decades, companies have been able to announce
stock buybacks to juice their stock price, but then they only
provide details months later on how, when, and even whether
they even completed their plans. Under SEC's new proposal, the
market and the SEC would understand when companies are buying
their stock and if executives are buying or selling at the same
time.
Taken together with unprecedented steps in the Inflation
Reduction Act to finally tax these buybacks--and I appreciate
Senator Tester and others on this Committee supporting that--
these are the first real steps we have seen in years to rein in
this Wall Street scheme, another example of a new President of
the United States who fights for workers and sides with
workers.
Chair Gensler, I look forward to hearing more about other
ways the SEC is working to hold bad actors accountable and
protect Americans who invest their hard-earned money in the
markets.
Ranking Member Toomey.
OPENING STATEMENT OF SENATOR PATRICK J. TOOMEY
Senator Toomey. Thank you, Mr. Chairman.
Chairman Gensler, welcome back to the Committee. Good to
see you again.
The SEC, as we all know, has a critical role to play in
protecting investors, maintaining fair, orderly, and efficient
markets, and facilitating capital formation. Unfortunately,
some of the SEC's recent actions and inactions raise concern
about how well it is carrying out this important mission. Take
for example the SEC's handling of crypto lending platforms like
Celsius and Voyager. Celsius and Voyager were offering interest
rates as high as 18 percent if customers would lend their
digital assets to them. The firms would then lend that crypto
to presumably other larger investors to make short-term bets on
cryptomarkets. But once the crypto selloff began, many
borrowers could not pay their debts, and these platforms froze
customer accounts.
The SEC did take enforcement action against BlockFi for
similar activities last winter yet somehow let Celsius and
Voyager continue through the spring when both companies blew up
and found themselves in bankruptcy, with investors staring at
billions in losses. Where was the SEC?
And where has the SEC been in clarifying the rules of the
road for cryptomarket participants? The Chairman insists in his
written testimony that ``the vast majority'' of cryptotokens
are securities, but he has also acknowledged that Bitcoin is
not. Now presumably, that is because Bitcoin is so thoroughly
decentralized, but that naturally raises the question: Where on
the decentralization continuum does a token cease to be a
security?
Most of these tokens do not even have a financial claim on
the issuer. Doesn't that make these tokens very different from
at least the vast majority of ordinary securities?
And if the Chairman is right that most tokens should be
considered securities, then, as he himself states in his
written testimony, ``It follows that many crypto intermediaries
are transacting in securities and have to register with the SEC
in some capacity.''
But crypto transactions typically can be settled in real
time on chain and without intermediaries. As a result, crypto
intermediaries often serve different customer needs, they have
got different business models, and they pose different risks
than traditional securities intermediaries.
All of that raises the question: What is the crypto
specific roadmap for these crypto intermediaries to register?
Stepping back, I think there is a larger problem here. As
Bloomberg columnist Matt Levine put it, ``Chairman Gensler's
posture is that he should be in charge of writing the rules for
crypto but not write them. I just do not see how that can
work.'' I think Mr. Levine has a good point.
Given the novel nature of these tokens, really, Congress
ought to step in and provide clarity. In particular, we need to
revisit the definition of security as part of a larger effort
to tailor a regulatory framework that is calibrated to the
unique risks and activities of the cryptomarket.
As I have said, cryptotokens have varying degrees of
decentralization, they usually do not have a financial claim on
the issuer and typically can be settled in real time without
intermediaries. These are very major and important differences
from traditional securities, and they merit a clearly stated
and tailored regulatory framework.
Now while the SEC has failed to provide the regulatory
clarity in the cryptomarkets, it has been issuing numerous
controversial and burdensome rules and proposed rules in the
ordinary securities market. Top of that list is the SEC's
climate disclosure rule. Public companies are already required,
legally required, to disclose material climate change
information. The proposed rule, however, would go much further,
to require disclosure of exceedingly extensive global warming
data.
This data will be enormously expensive to collect, but
almost none of it will be material to a business's finances.
For annual reports alone, the SEC estimates that aggregate
external compliance costs for issuers will increase from $1.9
billion per year to $5.2 billion per year if the SEC's proposed
climate disclosure rule becomes effective. The SEC itself again
estimates that the external compliance cost of a company going
public will increase by more than five times at a time when
excessive regulatory costs are already resulting in ever fewer
companies going public. The cost of compliance will be more
material to the investor than the information itself.
But, of course, the climate disclosure rule is not really
about informed investment decision. It is about equipping
climate activists with data to run political pressure campaigns
against companies, which will often be to the detriment of
shareholders. The end game is to discourage capital investment
in oil, in natural gas, and other traditional energy
industries, and we have seen how well that is working out in
Europe.
The SEC is wading into controversial public policy debates
that are far outside its mission and its expertise, and they
are doing it without the legal authority to do so. And in the
process, the SEC risks politicizing the Agency, slowing
economic growth, increasing inflation, and possibly even
undermining national security.
So given the importance of these issues, Banking Committee
Republicans have written to the SEC, asking basic questions
about how the SEC developed the climate disclosure rule.
Instead of providing real, substantive answers, the SEC has
been stonewalling us. Well, the SEC may not want to answer to
Congress on its climate disclosure rule, but ultimately, the
SEC will have to answer to the courts, which should make it
nervous. The Supreme Court has repeatedly held ``Congress does
not alter the fundamental details of a regulatory scheme in
vague terms or ancillary provisions. It does not, one might
say, hide the elephants in mouse holes.''
This summer, the Supreme Court applied this sensible
principle in the West Virginia v. EPA case. There, it ruled
that the Executive branch and its agencies cannot use novel
interpretations of existing law to pretend that they have got a
legal authority to support sweeping policy changes, including
on climate change, that Congress never intended. Well, that is
precisely what the SEC appears to be trying to do with its
climate disclosure rule. The SEC should consider itself to be
on notice by the Court that the separation of powers still
exists and will be upheld.
Thank you, Mr. Chairman.
Chairman Brown. Thank you, Senator Toomey.
Today, we will hear from Securities and Exchange Commission
Chair Gary Gensler. This is his annual trip here, but he
sometimes does that more often, and we thank him for that.
And, Chair Gensler, you are particularly welcome because
this will--we have a very good, well above average turnout
today, so enjoy that, but thank you for joining us, Chair
Gensler.
STATEMENT OF GARY GENSLER, CHAIR, U.S. SECURITIES AND EXCHANGE
COMMISSION
Mr. Gensler. Chair Brown, Ranking Member Toomey, and
Members of the Committee, I am honored to appear here before
you today. I want to start just by thanking you, this Committee
and all of Congress, for confirming our two new commissioners,
Mark Uyeda, who I know worked up here on the Hill, Jaime
Lizarraga, who worked on the other side of the Capitol for 32
years, terrific commissioners. It is welcome that we have a
full complement.
As is customary, I want to say that I am speaking for
myself; I do not speak on behalf of the fellow commissioners or
the staff in this hearing.
I would like to start by just discussing 2 key years in
policymaking a while back: 1933, 1934. I think it was when
Chair Fletcher sat in this seat, Chair Brown, if I recall my
history right, but it was in the middle of the Great
Depression. And President Roosevelt and Congress addressed the
crisis through a number of landmark reforms, and among them,
Congress and FDR came together to craft the first two Federal
securities laws. In 1933, President Roosevelt also suspended
the use of the gold standard. In other words, in those two
critical years, one could say that we replaced one gold
standard with, I would like to say, another, the securities
laws.
I really do believe the core principles of the securities
markets have contributed to America's economic success and
geopolitical standing. There was a basic bargain in there that
investors get to decide on what risks they want to take, but
there was a cop on the beat in securities laws where there was
full, fair, and truthful disclosure.
As we execute our mission to protect investors, maintain
fair and orderly, efficient markets, and facilitate capital
formation, we cannot take the leadership for granted, though.
Even gold medalists, especially gold medalists, constantly
train to stay ahead of the competition. And I do thank Senators
Kennedy and Van Hollen to help us a little bit with this issue
with China. We must remain vigilant to opportunities to drive
greater efficiency, integrity, resiliency across our remit.
First, markets work best when they are efficient. Now what
does that mean? That means that there is competition, there is
transparency in the middle of the market. When we lower the
costs in the middle, that means issuers have lower costs to
raise money and investors get better returns.
So we have done a lot, but we have not updated our national
market system, our equity system in 17 years. Imagine if you
had in your pocket a phone that was 17 years old. You would
think, oh, my God, maybe I should update that phone. Technology
moves fast.
We are also looking at the efficiency of our Treasury
market and, yes, our private funds market. Issuers and
investors also would benefit from greater competition because
it lowers the cost of capital, as I said.
Second, our system works best when there is integrity in
the market, and hence, we have rule proposals to bring greater
integrity into the market around special purpose acquisition
companies, the insiders trading plans, and so forth.
But another area is crypto, as Ranking Member Toomey
raised. Of the nearly 10,000 tokens in the cryptomarket, I do
believe that the vast majority are securities. Offers and sales
of these securities tokens are covered by the securities laws,
and given that, as the Ranking Member quoted me as saying, it
follows that many crypto intermediaries are transacting in
securities and have to register with the SEC in some capacity.
I would note when Chair Fletcher was in that seat there was
not a central electronic clearing and you could actually
exchange a security, person to person, in a paper form.
Thus, staff is working with market participants to help
ensure investors get time-tested protections in the market. In
that work and any work that Congress does, I do think we have
to make sure that we do not inadvertently undermine the
securities laws underlying a $100 trillion capital market. That
is the sort of motherlode. That is our capital markets. Crypto
is \1/100\th that size.
Third, markets work best when they are resilient, both in
normal times and stress. We have seen those stresses in 2008
and 2020. History tell us, no doubt, we will have stresses
again in the future. That is just the nature of economics and
finance. Thus, we have a number of projects on resiliency. This
includes shortening the settlement cycle. This includes the
work we are doing in the Treasury markets. It includes the work
we are doing around money market funds and open-end funds and
cybersecurity.
In all our work, we are anchored by the laws Congress
passed, the courts' interpretation of those laws, economic
analysis, and public input. And as the Commission, we benefit
greatly from public input including from Congress and this
Committee, Members, and I stand ready to meet with any of you,
one on one, nearly any time you want. We benefit from that
feedback.
Our capital markets are the gold standard. Let us do
everything we can to keep them that way.
I thank you. I look forward to questions.
Chairman Brown. Thank you, Chair Gensler. I think what you
have said--and I have heard you say this before in smaller
groups, publically, and bigger groups--that we cannot allow the
cryptomarket to undermine a $100 trillion capital market, that
is fundamentally our job here. Consumer protections, all that,
but fundamentally that is our job in the Banking, Housing, and
Urban Affairs Committee, and that is yours.
You have made improving transparency in corporate
disclosures a priority. In addition to the climate risk
disclosures, enhanced stock buyback information I mentioned
earlier, the Commission is addressing cybersecurity risks,
improving visibility, if you will, into concentrated ownerships
of stocks. Discuss briefly why it is critical that we improve
these types of disclosure for investments, large and small
investors, and for how markets operate.
Mr. Gensler. I would say, there is two core things and it
goes back to our founding. One was this basic bargain that
investors get to decide as long as they get the full and fair
disclosure, material disclosures, but full and fair
disclosures, and they get to decide, and you cannot defraud
them and mislead them. That lowers the cost of capital actually
because then there is trust in the market.
The second thing that transparency does is it helps promote
competition in the markets, and competition, that is the nature
of things. It promotes our economies as well and that
competition amongst intermediaries, amongst people trying to
raise money from the public.
So I would say those are the two things, not to mention
also market integrity.
Chairman Brown. Thank you. I have noticed today--I
commented, and Senator Toomey has confirmed this, that we have
seen--we will see an unusually high turnout of Republicans for
this hearing today. I think that the turnout of Republicans,
many of whom, against all evidence--many Republican Senators,
many of whom, against all evidence, are climate deniers, will,
I would assume, ask you questions about that, but let me go
with that.
On climate risk disclosure, specifically, discuss why your
Agency is--what you are proposing is not, quote, making climate
policy but, rather, how improving disclosure helps all
investors.
Mr. Gensler. Well, it is because right now hundreds of
companies and investors representing not trillions, but tens of
trillions of dollars of assets under management, are in this
conversation already. Investors get to decide. We are not a
merit regulator. Some people think we might be; we are not. We
are a disclosure-based regulator.
But investors today want to know about climate risk because
it matters to the future path of the performance, financial and
other performance. What are customers going to do? What is the
supply chain going to do? What might happen around the globe?
Because our U.S. issuers are operating in many jurisdictions
around the globe.
So it really does go back into when I buy or sell a stock,
or vote a proxy, climate risk matters to those investors. We
have a role to help bring some consistency to those
disclosures, so they are already happening.
Chairman Brown. Your clearly saying you are not a merit
regulator but a disclosure regulator is really important here,
and I hope my colleagues remember that you said that and think
that through as they ask their questions.
Let me ask about crypto in the last minute-and-a-half, the
cryptomarkets type securities and banking and commodities laws.
My colleagues developed legislation, as you know, that would
give the CFTC jurisdiction over part of the cryptomarket.
Remind us why it is important--I will ask two questions
together, so you can take the last minute-and-a-half.
Remind us why it is important for financial regulators to
coordinate oversight to make sure that gaps or loopholes do not
exist. And, would you agree to continue to work with our
Committee, the CFTC, and the banking regulators to make sure we
get this right?
Mr. Gensler. I do commit to that. Let me just say, when I
say that it is important to protect and ensure that the $100
trillion securities market works, it is because that is the
heart of how we price risk in our financial markets and how
investors save. And this Committee and the House Financial
Services Committee oversees that and wrote into law that there
was one cop on the beat, one regulator.
The definition of securities should be, I think, kind of
the exclusive remit of these two Committees--you know, I am
looking across the aisle--and the agency that you set up. If we
end up with that there is multiple Federal agencies defining
what a security is and another agency tries to define it, it
could undermine what we are doing as to when is a Treasury
security a security, when is something else in the equity
markets or elsewhere a security.
To your question about working together, we work together
with the other Federal financial regulators. We just yesterday
announced something in the Treasury markets that we worked hand
in glove with the Treasury and the Federal Reserve. With the
CFTC, I was honored to chair that agency. I love the Agency,
the CFTC. I love the SEC. It is like my three daughters.
But I do want to say that we work closely with the CFTC
with regard to a recent rule that we put out, and there are
many parties in the markets that are dual registrants. We have
dual broker-dealer registrants that are registered with the
CFTC and us, so as well on the fund advisory side. If Congress
moved forward to give the CFTC greater authority, let us say
over Bitcoin, then we would, of course, work together, but we
have already worked together dually on a number of enforcement
actions in the crypto space.
Chairman Brown. Thank you. One brief statement: Your
testimony mentioned the enforcement division shrank by 5
percent over the last 5 years; yet, despite that, the SEC has
pursued new cases in crypto, focused on fraud and misconduct
for financial professionals and securing admissions of guilt.
That does not happen often enough. I thank you for doing that.
Ranking Member Toomey.
Senator Toomey. Thank you, Mr. Chairman.
Chairman Gensler, in your written statement, you
acknowledge, as you have in the past, that there are some
tokens that are not securities, and I know your view that
whether or not a digital asset is a security is a facts-and-
circumstances analysis. I know your view that the SEC has very
broad authority, but you have also made it clear in the past
that Bitcoin is not a security.
Now some SEC staff have also previously said that Ethereum
is not a security. The SEC's DAO report characterizes Ethereum
as decentralized.
So here is my question. Briefly, and without getting deep
into the weeds on this--and I acknowledge your belief that most
tokens have a large degree of central control. But, generally
speaking, is it fair to say that a significant factor for you
in whether or not a digital asset is a security is whether it
is centrally controlled or decentralized?
Mr. Gensler. Well, I look to the Supreme Court that has
often written about this, probably close to a dozen times in 50
years. And it is whether the investing public is anticipating
profits, and that includes anticipating profits from
appreciation as well as from, as you mentioned, rights based
upon a common enterprise----
Senator Toomey. Right.
Mr. Gensler. --but the efforts of that common enterprise.
Senator Toomey. Right. So I guess another way to put my
question, which you have not answered is: Is it possible to
have a common enterprise if it is something that is
decentralized? How could it have a common enterprise? I mean,
isn't centralization necessary to constitute a common
enterprise?
Mr. Gensler. You could have some things that are quite open
but still have if the public is anticipating a profit based
upon that common enterprise. So I am being careful with my
words here to be accurate as best I can. The common enterprise.
Are you relying on a group of individuals?
And, look, these are not laundromat tokens. There is a
group of people that are actually----
Senator Toomey. No, you are not answering my question,
though. Let me try it this way. What is it about Bitcoin that
causes you to conclude it is not a security?
Mr. Gensler. Well, there is--one is there is no group of
individuals in the middle.
Senator Toomey. Right. It is decentralized.
Mr. Gensler. There is no group of individuals in the
middle----
Senator Toomey. Right.
Mr. Gensler. ----that are basically--and you are not--in
essence, we are----
Senator Toomey. So----
Mr. Gensler. The investing public is not betting on
somebody in the middle or six people in the middle.
Senator Toomey. So you are choosing not to word--use the
term ``decentralized,'' but that is what you are describing. It
is the decentralized nature of Bitcoin, I think, is really what
you are getting at.
Here is my point, and I am going to run out of time here.
But, there are a lot of projects, as you know, that--I mean,
decentralization and centralization occurs on a continuum
really, I think. And you have acknowledged that there are
tokens, plural, that are not securities. I think it is because
of the centralization that you come to this conclusion.
And my point is it is not reasonable to fail to provide
clarity, to provide the definition of exactly where on this
continuum you have a sufficient common enterprise that it
qualifies as a security and where you do not.
You have said Bitcoin does not. Some of your colleagues
have said Ethereum does not. But a reasonable developer who
wants to comply with this does not know where that line is
drawn.
Mr. Gensler. So I think we might have differences. There
are many factors, and so it is not one spectrum of
centralization versus decentralization.
What the Supreme Court--and I try to stick to--they are the
Supreme Court, and you know, there will be debates about other
laws. I try to stick to what they say, a common enterprise. I
think about a group of individuals in the middle. That
developer is in the middle, and the investing public is betting
on them, counting on them.
Even if the token might be on a thousand computers, that is
not what the Supreme Court is looking at. It is not about the
token being on a thousand computers. It is just like a group of
developers in the middle.
Senator Toomey. If there is nobody controlling it in the
middle, that is what we call decentralized, and that does
happen.
As you know, of course, the Howey Test requires all four of
the tests to be met in order for something to be defined as a
security.
Let me move on to another related issue which is, as I said
in my opening statement, I do not think that the SEC has
provided a crypto-specific roadmap to the registration of
crypto intermediaries. One example of the problem that arises
is the SEC's consumer--customer protection rule was written in
1972 and does not address how a broker-dealer should hold a
customer's blockchain private keys, for instance.
Now I know the SEC claims to have provided relief, but the
relief has very onerous contingencies. It is time-limited, and
my understanding is few, if any, broker-dealers have been able
to comply.
So I know you have said many times you want to have the
industry, the intermediaries come in and have a conversation
with the SEC about this. But wouldn't it be better if the SEC
came out and laid out how you would apply the rules and
regulations to these novel devices?
Mr. Gensler. So we are in conversations with a number of
these intermediaries across the exchange, the lending, the
broker-dealer, the custody space. As I said a year ago, in the
lending space, people should make no mistake. And I think it
sounds like, Senator, you and I might even agree that the
lending platforms are----
Senator Toomey. Right.
Mr. Gensler. ----under the securities laws.
Senator Toomey. Right.
Mr. Gensler. But in the exchange space and the broker
dealer space, I accept that people have not come in and used
what was put in place under Chair Clayton, that broker dealer
custody rule that you mentioned. And so I have said to staff,
let us use everything in our regulatory tool kit, whether it is
Exemptive Orders and others, to help facilitate and get this
industry--people will not have trust in this space unless it
comes into investor protection.
Senator Toomey. I am out of time, Mr. Chairman. So I would
just say my concern is that the approach you are taking with
these one-off discussions, if it did even result in an
opportunity to comply, it would be this idiosyncratic Exemptive
Order negotiated with a single company, and that is not a good
way to pass rules. It ought to be through the APA and a very
public process.
Mr. Gensler. If the Chair would forgive me, I think we have
been very clear through 70 or 80 actions, starting with that
DAO Order, the Munchee Order, and many others, and they were
full votes of the Commission, not just staff.
Second, I just look at other times in history. The SEC and
the asset-backed securities market took 10 or 11 years where
they did these, as you would say, Exemptive Orders or relief to
individual issuers and did a rule at the end of that 10 or 11
years based upon all that experience. So we actually believe it
is worthwhile to talk to the industry, talk to the market
participants, and get them registered.
Chairman Brown. Thank you, Chair.
Senator Tester of Montana is recognized.
Senator Tester. Yeah, thank you, Mr. Chairman, and I want
to thank you, Chairman Gensler, for being here as always.
Recently, I led a group of my colleagues writing to you
about your process for a significant number of proposals that
the SEC has been working on over the last year. I would think
that you would agree that it is important there is sufficient
opportunity for stakeholder input and feedback. One of those
proposals that I have been hearing about is the enhancement and
the standardization of climate-related disclosures for
Investors.
You probably know that I am a farmer. My wife and I, this
is our 45th harvest as a matter of fact. And as a working
farmer, I can tell you that I can understand the importance of
considering the impacts of climate change. This year was our
second worst harvest due to drought. Last year, due to extreme
weather conditions, was our worst harvest. So climate change is
real, and it appears like it ain't going away. So we have got
some issues to deal with.
I also know, though, that access to capital and markets to
sell our product and to produce our product is really
important, and I can tell you I understand the burden of
reporting information. I get surveys nearly every day about
what I am doing as a farmer. This week, there were a number of
farm groups that were in that I visited with virtually and in
person, a number of banks, and they were concerned about this
rule.
So from an ag production and agricultural standpoint, as
you also know, I do not have a lot of options as a farmer. I
tell folks, when I wake up in the morning and throw a couple
hundred gallons of diesel fuel in a tractor, it is not like I
have got an electric tractor in the garage that I can use. So I
am pretty well locked into fuel, diesel fuel, carbon-based fuel
at this moment in time.
So under this rule, what responsibility would folks in
production agriculture, specifically Montana farmers, have for
disclosing their emissions?
Mr. Gensler. Thank you for that question. Presuming that
those farmers are not public companies, they do not come under
the rule, but we have heard from various farm bureaus and, of
course, the American Farm Bureau Federation. Zippy Duvall, and
I have talked about this, and other Members probably know
Zippy.
Public companies would have an obligation under the
proposal with regard to greenhouse gas emissions, their own
emissions, and then we say in the rule that they estimate their
supply chain emissions if it is material. So it has got a
materiality catch, but it is just that they estimate. And we
have heard some folks in the farm----
Senator Tester. Community.
Mr. Gensler. Community. Thank you. The farm community. That
they are concerned. And so we are taking a very close look at
that amongst our 14,000 other comments on this.
Senator Tester. So let me give you a scenario. Markets are
really important. I like to direct-market as much as I can, but
not much is direct-marketed off of my farm. OK? I sell to
publically owned companies. OK?
Let us just take wheat for example. I sell wheat to a
publically owned company, and they start doing their assessment
on climate impacts, which I certainly do not have a problem
with, by the way. What am I--as a farmer who sold them grain,
for example, or you could say cattle or pick a commodity, if
the company says to me, look, if you are going to do business
with me, I got to have all this information, what are my
recourses?
Mr. Gensler. So what we put out--and again, we got some
very good comments, and we are working through this--is that
that public company you sell to does not have any obligation to
ask you, specifically. They either need to estimate or, if they
do not have an estimate, just discuss how they are managing
that Scope 3.
But I would say this is what the public comment process is
about. We have heard from 14,000 other people but particularly
in the farm community and how we sort of address this to lower
the cost because the intent, Senator, is not that--whether it
is the farm community or other community, if they are not
public companies, they are not under this rule.
Senator Tester. I have got it, but my concern, as I
indicated with my previous statement, was we sell to public
companies. I mean, the vast majority of the product that is
sold is to a public company. And if the public--and I just
bring this to your attention, and I do not want to repeat
myself. But if the public company says, hey, we need you, Jon
Tester, T-Bone Farms, to tell us how much fuel you used, how
much fertilizer you used, how much your inputs were and all
that, it becomes an issue. It becomes an issue, especially for
the little guy who is, you know, out there running a tractor or
fixing that tractor and does not have a lot of time to sit in
the house behind a computer.
Mr. Gensler. And I will say two things. One is that is not
the intent of what we did, particularly how we did it with a
safe harbor and only estimates, but two, that is the benefit of
public comment.
Senator Tester. Sure.
Mr. Gensler. That is why this helps us. And of course, we
will put this hearing in the public record, in our public
record as well.
Senator Tester. Thank you, Chairman.
Thank you, Mr. Chairman.
Chairman Brown. Thank you, Senator Tester.
Senator Tillis from North Carolina is recognized.
Senator Tillis. Thank you, Mr. Chairman. I want to try and
fulfill your expectation that some Republicans are going to
bellyache during this hearing.
Chairman Brown. Thrilled you listened to my opening
statement.
Senator Tillis. I did, and I also listened to Senator
Toomey's. I have been watching this in my office and want to
get back to something that Senator Toomey mentioned. You know,
we sent an oversight request several months ago, I think a
follow-up on July the 21st, looking for a written response to
our oversight request.
Chairman Gensler, I know your office, in the initial
response, provided a one-page response that suggested that we
meet with staff. I am kind of curious when we could expect
specific written response to the oversight request that
Republicans have sent you.
Mr. Gensler. Sir, we do stand ready, the staff, to meet
with your staff, to walk through the process, the process that
we have on any rule. We put out to the public--and that release
was in hundreds of pages--our economic analysis and the
rationale and reasons for that.
Senator Tillis. I think about 500 pages long.
Mr. Gensler. That is correct. That is correct. And we stand
ready, again, to meet and walk through that process with you.
Senator Tillis. Then I guess maybe we can just get a
commitment. There may be other Members who are interested. But
absent a written response, getting a commitment from you to
meet so that we can go through and get the answers to the
specific questions we had in the oversight request?
Mr. Gensler. We stand ready to have staff meet to go
through and generally talk about the process. I mean, I want to
be careful because it is really about to talk about and try to
address the questions that you have and the concerns.
But, again, this rule is rooted in decades of law, and it
is about a conversation that is already going on between public
companies and their investors. And investors, I think, would
benefit if we can bring some consistency to this fragmented
disclosure that is happening now.
Senator Tillis. We may follow up with staff, but we are
going to continue--first, again, congratulations on your
confirmation, but we are going to continue to press on answers
to some of the specific questions, but thank you for that.
The U.S. Treasury market is the single-most important
market in the world. Do you agree with that?
Mr. Gensler. It is the base upon which the rest of our
capital markets exist.
Senator Tillis. It does a lot. It is important to monetary
policy. It is important in protecting retirement savings for
U.S. workers. We can run down a long list.
I think your recent SEC proposal could inadvertently
curtail involvement and liquidity in the Treasury market. I am
kind of curious. Did the Commission really intend to require
customers to register as dealers?
Mr. Gensler. We put out a proposal earlier this year based
on a 1986 law about dealer registration.
Senator Tillis. Yeah. My understanding is the proposal
would classify any firm as a dealer if it transacts more than
specific amount per month. Is that true?
Mr. Gensler. There is two prongs, but yes, it had over $25
billion a month.
Senator Tillis. So how would a pension fund that frequently
transacts in the Treasury market and exceeds the trading
threshold set by the Commission, in order to protect the
retirement savings of its members, be considered a dealer under
any common-sense interpretation?
Mr. Gensler. It is about whether you hold yourself out--the
statutory definition is about holding yourself out regularly
and transacting in a marketplace. There is not--by the way,
that number--and we go through this economics in the proposal--
would not cover pension funds as we know it today.
Senator Tillis. So the nature of the trading would matter,
too?
Mr. Gensler. It is the size and scale of the Treasury
markets, as large as they are. It is also that their pension
funds are not trading at those types of levels that you
mention.
Senator Tillis. I have got a series of other questions, but
it would take me probably longer to ask it than I have time
remaining, so we will be submitting several questions for the
record.
And, again, I want to go back to the oversight request. We
need to kind of figure out how we can get the specific answers
to the question. I am happy to have my staff meet with you, but
we would also like to get a formal written response to the
request that we have now requested, a response in writing. A
discussion is good, but we will continue to press for that.
Thank you.
Mr. Gensler. Thank you, Senator.
Chairman Brown. Thank you, Senator Tillis.
Senator Menendez, you may proceed.
Senator Menendez. Thank you, Mr. Chairman.
Chairman Gensler, the last time you came before the
Committee, I asked you to move expeditiously to adopt the Asset
Management Advisory Committee's recommendations on diversity,
and last October, 22 Senators, including 9 Members of this
Committee, sent you a letter supporting the recommendations and
asking for immediate approval. Can you give us an update on the
status of adopting these recommendations?
Mr. Gensler. So I thank you, Senator. We have looked at--
there was four recommendations, and there are some subpoints in
those recommendations. And working--and I think we have
informed your staff about this with regard to two important
ones in there. One is a recommendation around guidance, staff
guidance on how asset managers are selected and whether their
years of service or their assets under management could be--
need to be taken into consideration or not, and another one is
with regard to EEO complaints and how those complaints are
shared with other agencies and the like. And I think we have
made some good progress on those two. I feel that staff will
probably shortly be putting out that guidance, and we continue
to look at the other two matters.
Senator Menendez. Well, look, I appreciate that you are
giving some of these recommendations serious attention, but at
the same time I must say I am disappointed. In so many other
areas, the SEC under your leadership has taken bold steps to
protect consumers, to strengthen oversight of markets, such as
your proposed climate risk disclosure rule. However, when
presented with AMAC's noncontroversial, unanimous
recommendations that would promote diversity in the asset
management field, you have not been as aggressive. So can you
commit to make concrete progress on these recommendations by
the end of the year?
Mr. Gensler. So, Senator, I take very seriously how
important diversity, inclusion, equity is important broadly in
our society but to the SEC as an agency. Our senior leadership
is probably the most diverse and inclusive that we have ever
been as an agency. We continue to lean in to try to make sure
that at our agency everybody can bring their best self to work
and work and that we get the benefit of the talent across this
great Nation.
And in terms of policy, it is held up in court right now,
but last year a self-regulatory organization, Nasdaq, put in
place a listing requirement with regard to their boards of
directors and diversity, and that was their decision, not ours.
It predated me, but we approved that.
And on these four Committee recommendations, as I said, I
think we have made some pretty good progress on two of them, I
think that guidance will be out in the near term, and we
continue to work on the others.
Senator Menendez. Well, I would like to highlight one of
AMAC's recommendations that I think would be particularly
impactful. The AMAC recommended that the SEC require enhanced
disclosure by investment companies and investment advisors
regarding diversity within their workforce and leadership. You
and I have spoken about the importance of leadership diversity
at your confirmation hearing. I just heard your comments now. I
think that disclosures about diversity are incredibly
important, which is why I introduced the Improving Corporate
Governance through Diversity Act.
Do you agree that enhancing diversity disclosures for
advisory firms, investment company boards and consultants would
empower investors and fund managers to make more informed
decisions?
Mr. Gensler. Again, as I said, I think that we benefit in
our organization, at the SEC, and in our great Nation by
tapping into the talents across our diverse Nation, and we
continue to look at this recommendation of AMAC with regard to
disclosures.
Senator Menendez. But one of the key findings of the AMAC
study is that--and for my colleagues, AMAC is an advisory board
that is created, you know, under the--I believe it is the SEC.
So one of their findings is that, quote, Investment performance
by diverse asset managers is equal to or greater than the
investment performance of firms that lack diversity in
ownership and senior leadership despite differences in size and
length of track record. And that is why they recommended that
the SEC issue guidance clarifying that fulfillment of fiduciary
duty does not require automatic exclusion of asset managers who
are new to the industry or do not meet a certain threshold of
assets under management.
In your view, is it necessary for fiduciaries to
automatically exclude new or smaller asset managers in order to
fulfill their duty?
Mr. Gensler. Senator, on that, on the guidance, I share
that view, I think, that you just said, and I think that is the
guidance that the staff is working to put. And you are right;
the AMAC is a Federal advisory committee. It is under the FACA
committee clause.
Senator Menendez. Let me close by saying, fundamentally,
using the excuse of fiduciary duty to exclude women- and
minority-led firms runs contrary to the actual data. AMAC's
study, along with a host of other studies by McKinsey, for
example, and others, have repeatedly shown that diversity-led
firms outperform their non-diverse counterparts.
And so given this data, I think that we can agree that new
or smaller asset managers being automatically excluded under
the guise of fiduciary duty is actually not helping investors;
it is harming them. And so that is why I have been pressing on
these issues and will continue to work with you. We hope to
have a robust response by the Commission.
Thank you, Mr. Chairman.
Chairman Brown. Thank you, Senator Menendez.
Senator Kennedy from Louisiana is recognized.
Senator Kennedy. Thank you, Mr. Chairman.
Thank you, Mr. Chairman, for being here today. I want to
also thank you for you and your good--your colleagues' good
work on implementing the Holding Foreign Companies Accountable
Act. Can you give us a quick overview about where we are?
China, I understand, has come to the negotiating table, and you
have negotiated a statement of protocol. Could you give us an
update on the status of your good efforts?
Mr. Gensler. Yes, and again, I want to thank you because
Senator Van Hollen--just came in--and you, you shepherded that
through. I think that the Holding Foreign Companies Accountable
Act gave us the additional leverage to work with Chair Williams
down at the PCAOB, and we had numerous meetings with the
Chinese.
We said to the Chinese last August, a year-plus ago, that
we would not be willing to send the inspectors over to China to
look at the audit work papers and the like unless we could get
a very detailed, prescriptive statement of protocol to
effectuate the will of Congress, and at its core it said how
can you trust the numbers in these Chinese companies unless
there is somebody in the U.S. who is auditing the auditor, so
to speak, technically inspecting and investigating. They did
sign that. We thought it was important to get that signed.
The PCAOB is sending inspectors over. I think they are on
flights tomorrow because I think it starts Monday the 19th and
it takes about 8 to 10 weeks to get through, so we will
probably know somewhere around Thanksgiving or early December.
And I do not know if the Chinese are going to comply. They
have told me--I mean, the Ministry of Finance has told me
directly on Webex calls, and the Chinese Securities Regulatory
Commission has said they will comply.
And it is pretty clear: No redactions in the work papers.
Take testimony from whomever the PCAOB needs to take testimony
from. They can onward share the information to us, and they can
pick whichever companies they want to look at.
Senator Kennedy. I am not sure they will comply either, but
they moved further toward compliance than at any point in the
past. Senator Van Hollen and I have a bill that has passed the
Senate, as you know, being considered by the House, to move the
deadline from 3 years to 2 years with respect to which if they
do not comply we tell them to leave our exchanges, and I think
that might help if we can get that passed. And I appreciate
your good efforts there.
In my last 2 minutes, I wanted to shift gears on the
climate risk disclosure, and I do not mean to be critical. I am
trying to understand because I thought Senator Tester raised
some very good questions. What is your best guess of the cost
of compliance with your climate risk disclosure rules?
Mr. Gensler. So, one, I do support your accelerating the
Holding Foreign Companies Accountable Act----
Senator Kennedy. Thank you.
Mr. Gensler. ----to 2 years versus three because I think it
will continue to have the right leverage. Even if the Chinese
authorities and the Chinese regulators allow for compliance
this year, what about next year, what about next year? So I do
support that.
Senator Kennedy. Thank you.
Mr. Gensler. In terms of the climate rule, we lay out in
this proposal all the economic analysis. And I do not mean to
speak for the numbers in that, but by company----
Senator Kennedy. What is your best guess, if you could? I
am sorry to interrupt you here, but I have only got a minute
left. What is your best guess of the cost of it to comply?
Mr. Gensler. So, per company, we lay that out. And
depending on the size--and I just do not want to misspeak--it
is, you know, from a couple hundred thousand to--I apologize.
Senator Kennedy. What is the total?
Mr. Gensler. And the total cost, I think Senator Toomey
accurately quoted it. You were not maybe in the room. It is
measured in the single-digit billions across the entire
economy. But what we benefit from is also people are coming in
and----
Senator Kennedy. Yeah, yeah.
Mr. Gensler. ----you know, giving us critical analysis to
whether we are accurate.
Senator Kennedy. I understand. I am sorry to interrupt, but
I am going to run out of time. Here is my question: It will
cost billions of dollars to comply. Those are scarce resources.
To the extent that people like Senator Tester has to spend the
money to comply, they cannot spend the money on something else.
Presumably, the purpose of the rule is to focus investors'
attention on the risk of climate change so that they will
demand that companies do a better job, the purpose of which is
to lower the world's temperatures. Am I doing OK?
Mr. Gensler. Actually, it is--but that is not the purpose.
The purpose--I mean, I can speak for the five-member Commission
but also for myself. We are not a merit regulator. So the
purpose actually is not to do what you said but just for
investors to get the information.
Senator Kennedy. I think the people supporting the rule,
that is their intention.
Mr. Gensler. That is not why I support it.
Senator Kennedy. OK, fair enough, but I think that is what
most people expect. You put pressure on the companies to
disclose. Shareholders put pressure. People do a better job.
But I would like to see--while you are asking Senator
Tester and the other people to estimate, I would like to see
some sort of estimate of how much all this money spent on
compliance is going to lower world temperatures. I mean, we are
spending--I believe in clean air and bright water. You know, I
want to be able to eat and live indoors.
But what bothers me is while we are spending these
trillions of dollars of scarce resources India and China--China
gets 60 percent of its energy from coal. China has 3,500 coal
fueled power plants. We have got less than 100. We do not have
any kind of agreement with India or China for them to reduce
emissions. So we spend all of this money, and world
temperatures are not reduced.
Can you give me your----
Chairman Brown. Chair Gensler, answer the question briefly.
Thank you.
Mr. Gensler. The good news is that is not what our
authorities are or what motivates this one commissioner. It is
about actually helping investors get more consistent
information. Even if they want to invest in what might be brown
assets rather than green assets, they will get more consistent
information and we will probably lower some of the greenwashing
that is out there and other things like that.
Senator Kennedy. Thank you for your indulgence, Mr.
Chairman.
Chairman Brown. Thank you, Senator Kennedy.
Senator Van Hollen of Maryland is recognized.
Senator Van Hollen. Thank you, Mr. Chairman.
And, great to see you, Mr. Chairman. Great to see an SEC
Chairman from the great State of Maryland.
Mr. Gensler. It is great to see my Senator.
Senator Van Hollen. Yeah, right. Let me just pick up on the
first point that Senator Kennedy raised in terms of
implementation of the Holding Foreign Companies Accountable
Act. I just want to thank you and your team for pursuing that.
I also agree we should shorten the time period to 2 years,
and I want to thank Senator Kennedy for his work on this. The
idea, of course, was to make sure we protect American
investors, especially smaller investors, by ensuring that all
companies listed on our exchanges comply with our accounting
rules.
And I know you had very tough negotiations with China.
Thank you for keeping us informed. The ultimate proof is in the
pudding, right? Their execution of it. But I do want to salute
you and your team for all your efforts to date on that.
I also want to thank you for moving ahead on a rulemaking
to crack down on abuses of 10b5-1, trading plans by insiders.
At the beginning of this Congress, Senator Fischer and I
introduced legislation directing the SEC to undertake such a
rulemaking. You did it, and we are monitoring that carefully.
I do not know if you saw the Wall Street Journal article
back in June, which I think, along with other studies, revealed
clear abuses by insiders in these areas. And of course, when
insiders benefit, it means the investors lose often because
sometimes these are gamed to take the gains before the overall
value of a company decreases stock value. So I want to thank
you for that, and we are monitoring that.
I also want to thank you and your team for recognizing the
real issue of fraudulent scams, securities scams, often
directed against seniors. These amount to up to $3 billion
every year. And we have a bipartisan bill here that I know the
Chairman and the Ranking Member are probably tired of hearing
of, but I appreciate their, I think, support for the bill which
is to empower states to better crack down on this fraud by
creating a grant, Federal grant, through the SEC to help them
out. And we have heard testimony on behalf of state insurance
commissioners and state securities commissioners strongly
indicating their support.
So you recognize this as a big problem that we should deal
with, do you not?
Mr. Gensler. Oh, I do. I think that fraud, as you said in
the elder community, or sometimes it is affinity-based fraud,
we see all too much of it at the SEC in our weekly enforcement
meetings.
Senator Van Hollen. I am sure you do, and we want to pass
this legislation just to better fortify states to crack down on
this kind of fraud.
We are working with you on the TICKER legislation as well,
Senator Scott from Florida and I.
I want to ask you about something you and I have spoken
about before, which is country-by-country reporting disclosures
by big, multinational corporations. We are seeing jurisdictions
around the world, including the EU and now Australia, move
toward increased disclosure requirements for large,
multinational corporations to disclose the countries in which
they book profits and pay taxes as a way to mitigate tax risk
to investors. We have a changing international tax
environmental, and clearly companies that have put a lot of
eggs in putting their profits in sketchy tax havens, their
investors are at risk, and that is why we believe as part of
providing investors with necessary information we should
provide country-by-country disclosures.
I was pleased to see the SEC take steps to protect
investors' interest in May by allowing them to put forward a
proposal at Amazon's shareholder meeting that would ask the
company to disclose its country-by-country reporting.
So my question, Mr. Chairman, is: In this rapidly changing
international cooperation tax landscape, can you look at this
question about whether new investor disclosures are needed in
this area?
Mr. Gensler. So, Senator, I thank you. And we are looking
at it, and as I discussed with you when we got together on the
phone, the Financial Accounting Standards Board actually has a
project, and we sometimes, you know, let them know. And I want
to say publically here I support the Financial Accounting
Standards Board's project around breaking out and
disaggregating tax reporting for public companies.
I believe that--I do not want to speak for them, but--in
the next handful of months they are going to go forward. And it
breaks out I do not think every country, but I think the top,
you know, couple of handfuls of countries. And then they will
sort of promulgate that, get public feedback, and back and
forth. But I think that that would be a productive approach, to
have such disaggregation that FASB is considering right now and
has an active project on.
Senator Van Hollen. Thank you, Mr. Chairman. I may have
some questions to submit for the record, but I appreciate it.
Thank you.
Chairman Brown. Thank you, Senator Van Hollen.
Senator Cortez Masto from Nevada is recognized.
Senator Cortez Masto. Thank you.
Chairman Gensler, it is good to see you. Thank you for
being here.
Mr. Gensler. Good to see you.
Senator Cortez Masto. Let me talk a little bit about crypto
regulation. Under your tenure, the SEC has pursued enforcement
actions against crypto asset insurers. However, few cases have
been brought against the exchanges, and crypto assets are, as
we know, traded primarily through the exchanges. The SEC has
proposed that intermediaries should be regulated under the
Exchange Act.
So could you address this? Why should crypto asset
intermediaries and exchanges be regulated under the Exchange
Act, and if you would, how would investors and market
participants benefit from regulating crypto assets under the
Exchange Act?
Mr. Gensler. So, I thank you. It is actually fairly
straightforward because of these 10,000 cryptotokens. Without
prejudging any one of them, I believe that the vast majority
are securities because there is a--somebody in the public is
betting on a better future, betting on anticipating profits, on
a common enterprise group of entrepreneurs in the middle. And
then given that, these intermediaries that often have 50 or 500
tokens, or 150 tokens, they are going to have a bunch of
securities on that platform.
How does it benefit the public? It is the time-tested
protections that these crypto exchanges would protect against
front-running and manipulation, and there is transparency as
you go into the New York Stock Exchange or into Nasdaq or the
like. This Committee has worked on laws long ago. I
complimented Chair Fletcher, who was here in 1934 and did it,
but long ago, for that very reason, the public benefits.
Right now, frankly, there is a fair amount of
noncompliance, and so we are going to continue to try to work
with the intermediaries, get them inside and regulated, if need
be, use our tool kit, our regulatory tool kit to adjust and
facilitate because there are some differences, as Senator
Toomey and I talked about earlier.
Senator Cortez Masto. Would you be able to, through the
enforcement, also identify potential money laundering activity?
Mr. Gensler. It is more the remit of the Department of
Treasury. However, one of the key things under, as I
understand, the money laundering laws, the SEC has a role that
our registrants, the exchanges, the broker-dealers have certain
compliance obligations over with the Financial Crimes
Enforcement Network at Treasury. Once they register, or whether
they should register--and I believe it is even if they do not
register but they are legally required to--they have to comply
with that.
Senator Cortez Masto. Thank you. Let me jump back to--
because I do think Senator Kennedy--and I appreciate his
willingness to explore, to understand the issue of ESG and the
requirement.
My understanding--and thank you for your position and how
you perceive that regulation. But because now we have a whole
new generation of investors that are really conscious about
green and going green, there are new investors now that are
looking for ways to invest to be consistent with their values
in this role, correct?
Mr. Gensler. There are. There are also investors that are
just thinking, because of climate risk, it could affect the
financial performance of a company; it could affect their
supply chain; it could affect their competition; it could
affect future regulations. So they are thinking about how to
value today that future transition risk.
Senator Cortez Masto. Thank you. And then there was also
conversation--and I appreciate this as well--about the issue of
greenwashing, and I know some major global asset managers and
climate advocates have stated that the ESG integration label
could pose greenwashing risk. Can you talk a little bit about
that and address that?
Mr. Gensler. So there are asset managers managing trillions
of dollars that are saying to the public, we will invest your
money, your money, in something that is carbon neutral or green
and the like. And so to me it is about truth in advertising,
and so we put out some proposals earlier this year to address
what stands behind a name, literally the name of a fund, and
are you living up to the obligations that you made or
commitments you made to your investors when you ask for their
money. And I think that is really important, about the
integrity, and it would address some of this, what is sometimes
called greenwashing.
Senator Cortez Masto. All right. Thank you.
Thank you, Mr. Chair.
Chairman Brown. Thank you, Senator Cortez Masto.
Senator Rounds from South Dakota is recognized.
Senator Rounds. Thank you, Mr. Chairman.
I was going to start out today visiting a little bit about
farmers and ranchers, but I understand that Senator Tester beat
me to it. And I think the fact that we really do have a concern
about the ambiguities that some of our farmers and ranchers
have right now with what they are going to be expected to try
to share with providers of products to them with regard to
downstream environmental impacts, really is of concern, and the
ambiguity which it has been left with what, you know, can be
guesstimates and so forth is something that I really think you
need to take a second look at. It is just----
Mr. Gensler. Senator, I concur with you. As we talked in
the anteroom earlier, we thought the proposal had the right
balance because we said it is only an estimate. It is only
public companies. It is only if it is material or they made a
commitment to it and they have a big safe harbor.
But we heard a lot from the farm bureaus, and so we are
taking--you know, that is what we do. We take a look of all the
public comments and see how we can ensure that it does not
touch those private actors.
Senator Rounds. And that is precisely what I really wanted
to talk about. It is one thing with the rules. It is another
thing when there is an expectation that once the rules have
been established, if they are really ambiguous, then that means
that each time they have to come back to a regulator to ask
whether or not what they are doing is accurate or not. And I
think--and that causes some serious concerns for people that
want to invest. So I just simply say, look, if you are making
rules on these, and clearly you are making rules, a lot of
them, let us be as precise as we can in them, and I think that
will eliminate a lot of the questions that are coming up, sir.
Let me go into just a couple of items very quickly here. In
a speech that you delivered last week, you quoted Joseph
Kennedy, saying, no honest business should fear the SEC. You
went on to say that, given the nature of crypto investments, I
recognize that it may be appropriate to be flexible in applying
existing disclosure requirements.
Matt Levine openly questioned that sentiment in a column
for Bloomberg, stating, the SEC has been suing crypto projects
for illegally issuing securities for about 5 years now, but put
in that time it has not issued any rules or proposed any rules
or put anything on its rulemaking agenda about adapting the
securities and disclosure rules for crypto projects.
I echo Mr. Levine's comments. It seems to me that you want
to regulate an entire marketplace, but clearly, it does not
appear that you have got rules in place to do so at this time.
In my mind, this is simply unacceptable.
And I know that your background in the private sector is--
you know, you have got a great history in the private sector,
so this is kind of confusing to us. I have heard from a variety
of companies who claim they try to work with you and with your
organization but then you turn around and then you have hit
them with some pretty enforcement actions or slow-walk the
process.
Mr. Chairman, you keep telling crypto entrepreneurs and the
companies to come in and to register. Has anyone actually tried
to do that?
Mr. Gensler. To answer your question, there is six
companies that are actually registered under the disclosure
regimes. I would say this; not liking the answer from the SEC
does not mean there is not guidance, just with all fairness.
And most of these tokens, a vast majority, are securities, and
thus the intermediaries are likely to be in noncompliance with
securities laws right now. So we are really trying to work with
them. We are talking to a wide swath of these organizations
right now to get them properly registered, to get them inside
the remit, and this is what we do.
With all respect to Mr. Levine, we have been pretty clear;
my predecessor, Chair Clayton, was through Commission actions
and in his public voice in front of this Committee and others
about this matter, and we are going to continue to protect the
public as best we can.
Senator Rounds. Thank you. As of August 2022, the SEC had
proposed 32 new rules in just 11 months and is preparing at
least another 19 for release in the next year. These are
complex rulemakings that will greatly impact markets and
capital formation. In addition to that, these rules are being
implemented in an overlapping timeline and affect the same or
interconnected financial products and market sectors. However,
despite the linkages between the various proposals, the SEC has
assessed the economic impact of each rule independently and in
isolation from the others. Implementing these proposals
simultaneously, without consideration of the cumulative and
cross-sector effects, will most certainly lead to unintended
consequences.
Mr. Chairman, why has the SEC not considered the cumulative
and the cross-sector effects when simultaneously implementing
these proposals that most certainly could lead to negative and
unintended consequences for our capital markets and broader
economy?
Mr. Gensler. Senator, we actually do consider cross, even
within any one of the 30. It is actually as of yesterday 34, to
bring you up to date.
Senator Rounds. Moving along.
Mr. Gensler. Moving along. I would note that Chair Clayton,
during his 4 years, did a little over 60 final rules. We have
about 50 on our docket. So it is--and Chair Schapiro and Chair
White were about the same, 40 to 60 range, during their 4
years. We might have been a little sooner getting them out to
proposals.
But we do consider those cross issues. I mean, sometimes we
even reopen proposals for that reason, like we did with stock
lending and stock buyback, and we reopened because there was
this cross consideration. We have done it in some other areas.
We are even looking now whether we should do that in some areas
and reopen some for that cross consideration.
But last, I would say we get comment letters after the
comment period as well, and we--you know, this is over the
years, and we do it now. Staff reads them. They put them in. It
takes us--it tends to take us months, sometimes a year to 18
months to finalize a rule after it is proposed.
Senator Rounds. Thank you. I wish we could continue the
conversation, but my time has----
Mr. Gensler. I think you still have my cell phone number,
so you can call me anytime, sir.
Senator Rounds. Thank you, Mr. Chairman.
Chairman Brown. Thank you, Senator Rounds.
Senator Smith of Minnesota is recognized.
Senator Smith. Thank you, Chair Brown and Ranking Member.
It is interesting, just apropos Senator Rounds's comments and
questions about crypto, I was not here earlier because I was at
the Banking Committee, where we were having a conversation
about issues--I mean, I was at the Ag Committee, pardon me. I
know, where am I? See, I am a little confused. I have been
running around.
Anyway, I just note that there are a handful of us, you,
Senator Brown and Senator Warnock and I, that serve on both
Agriculture and Banking, Housing. And as the issues of how we
should create a regulatory framework for crypto commodities,
digital commodities as well as digital securities, I think we
have--you know, we have an important job to do here.
Chair Gensler, on the--I want to go to the question of
materiality. On securities laws, they are grounded in the
concept of materiality. And since we have emerged from the
Great Depression, we have acknowledged that investing in the
stock market comes with its risks, but investors ought to have
information that they need to be able to prudently evaluate
those risks and make good, informed decisions.
And this is especially important today as more than half of
families have investments in the stock market, including their
retirement nest eggs. So could you talk to the Committee just
broadly speaking about how climate disclosures for public
companies are material information for investors?
Mr. Gensler. It is material because the Supreme Court says
substantial likelihood a reasonable investor is considering it
significant in their mix of information. And right now, it is
really remarkable what has happened in the last 10 to 20 years.
So many investors are considering it.
And why are they considering it? Because there is a future
chance of transition risk. They might have to change their
operations. Their competitors might change their operations.
Laws might change. These companies that are listed here in the
U.S. operate around the globe. On average, if you look at the
top 500 or 1,000 companies, half their operations are overseas.
And so it can affect all that, but it is material because, as
the Supreme Court says, because investors get to decide what
risk they take and investors are saying it.
In our comment file, if you look at the top 300 or 400 of
the investors, the big asset managers, it adds up to $50
trillion of assets under management that have come in mostly
supportive of this. I mean, I know that there is a lot of good
discussion about what do we do about the farmers and not
getting caught up in Scope 3, which is a good conversation we
have had, but mostly the investor community has come in, in
these 14,000 comments, supportive.
Senator Smith. And it is good for those investors to be
able to understand what those risks are in a more comprehensive
and clear way.
Mr. Gensler. Absolutely. And, investors get to decide. If
somebody says, I think those risks are significant, but a
company is managing it well. I should invest in it.
They might say that, you know, I think that the market is
overpricing a stock, and they might say, I want to sell that
stock----
Senator Smith. Right.
Mr. Gensler. --because I do not think this--I think that
assets that are emitting a lot of emissions are still going to
be really profitable. That is up to investors.
Senator Smith. On another topic I want to touch base on, I
was pleased to see the SEC take action to increase transparency
and accountability in the private fund market. Private funds,
including private equity and hedge funds, have an outsized
presence in our economy, $18 trillion in assets, and a
substantial portion of that again includes retirement savings
held in pension plans for teachers and municipal employees and
others. And in recent years, individual ownership of private
funds has also been on the rise.
So, Chair Gensler, can you talk about the recently proposed
amendments to Form PF and the private fund advisor rules and
how they would--you know, how they interact with eliminating
conflicts of interest issues, protect investors, and protect
the integrity of the private fund market?
Mr. Gensler. So we have done two sets of rules with regard
to private funds, one, to promote greater efficiency. What that
means is lowering the cost of this. It has actually grown since
that number, about $21 trillion. And they probably take
revenues of about $300 billion-plus, and that means those
teachers, firefighters, those pensioners are getting a little
lower, potentially, returns. So it helps them. So we are trying
to promote greater efficiency, transparency of fees,
performance, and side letters.
You mention a form called Form PF, Form Private Fund. That
is something that was put in place after the '08 crisis.
Congress thought the SEC and our sibling agency, the CFTC,
should get more information about these funds with regard to
mitigating and monitoring for systemic risk, the big crisis of
'08, and we are updating those forms.
Senator Smith. Thank you.
Thank you very much, Mr. Chair.
Chairman Brown. Thank you, Senator Smith.
Senator Lummis from Wyoming is recognized.
Senator Lummis. Thank you, Mr. Chairman. Appreciate your
holding this hearing on the important work of the SEC.
And, Chairman Gensler, it is great to see you again. So I
want to dive into a component of the Lummis-Gillibrand bill,
which you have had a chance to see, that deals with Section 301
of that bill. I agree with statements you and your predecessor,
Jay Clayton, have made that initial coin offerings, where
digital assets are sold to investors expecting to profit from
the seller's efforts, should be considered investment
contracts.
Senator Gillibrand and I share your concerns about
information gaps that can arise when digital assets are later
used and traded by others and the need to ensure users can make
informed decisions in the market. So we believe that it is
those that raise the money through an initial sale of digital
assets and those that continue to provide essential managerial
efforts should be held responsible to provide disclosures to
the market and that innocent secondary purchasers of digital
assets, that may or may not be aware that they are trading in
securities, should not be subject to strict liability.
So in our Act, the Responsible Financial Innovation Act,
rather than attempting to impose new, complex, difficult to
apply rules on secondary purchasers not involved in fundraising
transactions, Section 301 of our bill provides for robust
technology-neutral disclosure obligations that would hold
responsible those who benefited from that fundraising, not the
innocent users of digital assets who have no way of knowing
what the sponsor is up to.
So my question is this: Do you have any thoughts on the
need for disclosures in the digital asset markets in Section
301 of our bill?
Mr. Gensler. So I thank you for the question. It was good
to meet with you and Senator Gillibrand and discuss these as
well. I think that the disclosure, as you say, is key. We even
recently just were setting up a new industry office to help the
disclosure in this field in our corporate finance area.
I do think that, as you say, the innocent purchase. Let us
say the public. The public does not have a disclosure
obligation when they buy a stock on the New York Stock
Exchange, and it is not the public that should have a
disclosure obligation if they buy some crypto security token.
But the entrepreneurs, the sponsor, the promoter, the
entrepreneurs, that is where the disclosure obligation ought to
be, and I think we have authorities now to facilitate and
actually have a different set of disclosures just as we have in
other fields. We have different disclosures on something called
asset-backed securities than we do for equities.
But I do think where I might respectfully differ from, I
think, what might be in the question is that I think in the
secondary market, 5 years after a stock is issued, you know, a
stock of a great U.S. company is issued, there is still a
disclosure obligation.
And I think that is what Congress did in 1933, passed a law
saying you have got to make a disclosure if you raise money
from the public.
But the Congress knew that was not enough, and in '34 they
came back and said, you know what? We also have to cover the
secondary market in two ways, cover the intermediaries, like
the stock exchange and the broker-dealers, but also say that
there has got to be what is known as periodic reporting. You
know, the annual report.
And so--or maybe there is no difference here, but I think
the investor should not have an obligation. It is the
intermediaries, and then it is the common enterprise or the
folks in the middle.
Senator Lummis. And are you thinking that that disclosure
option or obligation would be similar for initial coin
offerings under our bill, or should be under our bill, similar
disclosure options as were instituted in 1934?
Mr. Gensler. I think similar in kind, but probably there
are some things--it might be a little bit different list. I
mean, there might not be a board of directors and things like
that. So I really do think--your bill had a list. We might
differ on that list. We might have other things to put on that
list. But it is not necessarily, as you say, everything that a
big multinational company is doing.
Senator Lummis. OK. Well, I want you to know that Senator
Gillibrand and I want to continue to work with you and your
staff to make sure that to the extent that we do not
philosophically disagree, that any of those sorts of gaps that
you have identified in our bill can be addressed because I do
not see our bill having an avenue to come before this Committee
or the Congress before the end of the year, but we do intend to
have it--to reintroduce it in January. And we want to make sure
that between now and January we have worked with you and your
staff to make sure that we can address items that we can
mutually agree need to be in the bill.
Mr. Gensler. I look forward to that and particularly, as I
said, in ways that we can ensure we do not undermine the $100
trillion capital market, the definition of security, the
definitions of other things that really are under this
Committee and stay under this Committee.
Senator Lummis. And we have talked about unintended
consequences of our bill before with you. We want to address
those unintended consequences. Obviously, you see things that
maybe we do not because of your perspective.
Mr. Chairman, thank you.
Really appreciate your being here, Mr. Chairman.
Chairman Brown. Thank you, Senator Lummis.
Senator Ossoff from Georgia is recognized.
Senator Ossoff. Thank you, Mr. Chairman.
And, Chairman Gensler, great to see you. Thanks for your
service. Thank you for your testimony.
Mr. Gensler. Senator Ossoff, good to see you again.
Senator Ossoff. I have routinely asked you this question. I
have also put this question periodically to Chair Powell and to
Secretary Yellen. What do you see as the most significant
threats to financial stability, or to put it another way, what
keeps you up at night?
Mr. Gensler. You do not want me to say my daughters. OK.
Look, I think in terms of--we are living in uncertain
times. I do not need to say this, but with the war in Eastern
Europe and Ukraine, with central banks around the globe moving
from accommodating to tightening, with the remaining, you know,
challenges, geopolitical challenges between great Nations, and
also with COVID and commodity prices, all of that in the mix,
what I look at and think about is the relationship between the
banking sector and the hedge fund sector and investors, the
relationship between the banking sector and commodity traders.
That is called a prime brokerage relationship, and those
relationships I really do think a lot about.
I think about resiliency in the market, and that is why we
have about a dozen or 15 projects in the Treasury market, what
we are trying to do in money market funds and open-end funds,
shortening the settlement cycle and the like. I think that if
we do our job well at the SEC we will build greater resiliency
for the stresses that come in the future, and those stresses
come because that is what an economy--we always have ups and
downs in economies.
So we have these longer-term projects, but near-term, it is
these issues that I just raised.
Senator Ossoff. Well, let us talk a little bit about the
Treasury market. You highlighted that in previous testimony.
You issued proposed rulemaking in the last several days. Can
you please break down into layperson's terms the nature of
concern about illiquidity in Treasury markets and how the
actions you are proposing to consider taking would address
them?
Mr. Gensler. So I would say to the American public it is a
big market. It is a quarter of our entire capital markets, $24
trillion. You can think of it as the base. It is sort of the
foundation of our financial house. Everything else is built
upon the Treasury market.
And what we have found is we have had real disruptions.
Call them jitters. I hate to say it; in the house way, it is
like there are some termites somewhere in the foundation, every
few years. We had them in the 1980s and 1990s, and we had them
in the last 6 years. And it put some pressure on our central
bank, the Federal Reserve that sometimes then opens up and
provides, using its balance sheet liquidity to the marketplace
sort of as a lender of last resort.
I think that we can lower the risk in that marketplace by
bringing--ensuring that all the dealers, the high frequency
trading dealers are registered and regulated; second, that
where the trading happens--these are trading platforms--are
regulated, and some of those are not; and really importantly,
getting the benefits of something that sounds boring, but it is
called clearing. It is the back office, which lowers risk in
the system.
So those are the main things. We have worked really closely
with Secretary Yellen and her team, and Chair Powell and his
team, on those proposals.
Senator Ossoff. Do you think that the persistent concern
about illiquidity in the Treasury markets threatens the Fed's
ability to execute open-market operations in a crisis?
Mr. Gensler. I think, if I might say, if we do this suite
of proposals in the Treasury market, it will bring greater
competition. There, historically, was a group of primary
dealers. Then that started to broaden out to these principal
trading firms, high frequency trading firms, and others. And I
think that we will build greater resiliency and also increase
some competition in the marketplace----
Senator Ossoff. OK. Let us follow up on this, and I will
have my office get with yours.
Mr. Gensler. Please. I would love to have a meeting.
Senator Ossoff. Great. And with my brief remaining time, I
want to ask about something of particular concern to Georgians.
We have thriving military communities, base communities,
veteran communities in Georgia. The SEC has, in the past and as
recently as December of 2021, filed emergency action to shut
down a multimillion-dollar Ponzi scheme that targeted
retirement funds held by veterans. I would like to ask for your
commitment that under your leadership the SEC will redouble and
intensify its efforts to ensure that within your jurisdiction
you are identifying and cracking down on schemes that could
defraud or harm America's veterans.
Mr. Gensler. You have that. And I would also say to all
Georgians and veterans, if you see something, you know, we have
a tips, complaints, referrals system. We have a whistleblower
system. Please let us know. Let the SEC know. We are a little
understaffed. I think we should have more staff, but let us
know. We will try to follow up and pursue those leads as people
see them.
Senator Ossoff. We will pass that along. Thank you.
Chairman Brown. Thank you, Senator Ossoff.
Senator Hagerty from Tennessee is recognized.
Senator Hagerty. Thank you, Chairman Brown.
Chair Gensler, I was reviewing your testimony last night,
and I was struck by a term that you used as you described the
Nation's securities laws and regulations. You described them as
the ``gold standard,'' and I do not believe that is true
anymore. What we have seen here in America over the past two
decades is the number of publically listed companies decline by
more than 40 percent. If you look at the U.S. share of global
IPOs, we have shrunk to less than 20 percent in the past
decade.
Why is that? It is because every new regulatory requirement
that you impose on public companies adds to the already
crippling costs of operating as a public company. So the
consequence of all these regulations is to encourage companies
to stay private or to look abroad to do their IPO.
You have rolled out 32 proposed rules in the past year,
including your ESG disclosure rule, which will cost hundreds of
millions of dollars a year in compliance cost and it has
created tremendous uncertainty in the marketplace. This will
undoubtedly make matters worse.
America had such a big lead in terms of having the world's
best capital markets, capital markets that have allowed
businesses to succeed here and thrive, but it has been in spite
of, not because of, this increasingly crushing red tape. More
regulation is a recipe for the preeminence of American capital
markets to die a slow death. If we continue down this path,
there will not be any investors left to protect. American
workers, American consumers, and retirees cannot afford that.
So, Chairman Gensler, under your tenure at the SEC, you
have rolled out an unprecedented slate of aggressive rule
proposals. Among the many troubling trends in your short term
as Chairman has been an expansion of the SEC's purview into
sophisticated markets under the guise of, quote, consumer
protection.
Because not all markets are accessible to retail investors,
the SEC has traditionally adopted differentiated levels of
paternalism depending on the given market, but the two most
egregious examples of this creep that is happening right now
are the private funds rule and the SEC's announcement that it
would begin to force significant disclosure requirements on
fixed income securities, including those that are regulated
under Rule 144A.
And your staff claims that these new rules will then,
quote, enhance investor protection, but as you know, the
qualified investors that invest in these products are not
unsophisticated. They do not need handholding in performing
their own due diligence. Yet, these new rules will pose
significant new costs, and they will act as an impediment to
American innovators who need early stage capital to grow.
So my question to you is: Do you think that the distinction
between large and mostly institutional investors versus mom-
and-pop investors is somehow unimportant? Or, is there some
other motivation that is driving the SEC under your guidance to
dedicate so many resources to go after these larger investors,
these investors that all of your predecessors, I think rightly,
have given a degree of autonomy to?
Mr. Gensler. So, Senator, I think that there is a
distinction between what is called accredited investors and non
accredited investors. But I do think in the private funds rule,
if I can address that, this is now a $21 trillion assets under
management that the general partners, the asset managers, who
oppose what we are doing--I understand that, but those asset
managers probably collect over $300 billion a year in revenue.
And what does that mean? That means the issuers on one side
and the investors on the other side have that $300-plus billion
in the middle.
Now I think that you gave us a responsibility to look to
promote competition and efficiency in these markets. You did it
in 1976 in law; you did it in 1996 in law twice, that we have
that responsibility.
So in that proposal, it is we took a lot of the
recommendations from a group of limited partners, state pension
funds, state treasurers, and a group called ILPA, and we looked
at them and said, how can we promote greater competition
through transparency to those investors, those sophisticated
investors? That is what we are trying to do.
Senator Hagerty. Your suggestion is that this is going to
lower the cost of investment? This is going to increase the
cost because it increases regulatory requirements. Where are
you going with this?
Mr. Gensler. Yeah, I think that we might have a healthy
debate on this, but I think that actually when you have got
general partners that are taking $300 billion out of the
economy this will help promote greater competition----
Senator Hagerty. Increases regulatory cost, promotes
greater competition in the sophisticated market, I do not buy
that one bit.
Mr. Gensler. It is greater transparency to the investors of
the fees and performance.
Senator Hagerty. These are sophisticated investors, Mr.
Chairman. This is damaging to the marketplace. I have been on
the other side of the table there. Small companies that need to
access capital to grow are going to be deprived of that capital
because of this type of overreach.
Thanks, Mr. Chairman.
Chairman Brown. Thank you, Senator Hagerty.
Senator Warner from Virginia is recognized.
Senator Warner. Thank you, Mr. Chairman.
I want to stay on this topic for a moment, Senator
Hagerty's point. But you know, I do think from a historic
basis, as we have talked--and good to see you again, Mr.
Chairman--you know, that you are in that range of what your
predecessors have done. But I do think, you know, it is an
aggressive agenda, and candidly, a lot of it I support. I may
disagree with some of my colleagues on the other side.
But because you have been moving quickly, one of the things
I would like--and this falls a little bit on Senator Rounds's
comments. I would like you to fill in a little more both on how
you make sure that you determine appropriate comment times--and
I know in some of these regulations you have extended the
comment times. Some of them I do feel have been have too short.
But I would like you to also give me a little more
specificity about this interaction, not simply in terms of
total economic costs, but possible conflict for I am going to
come back and follow up for a moment on cybersecurity areas. I
just would like to get the sense. If all of these regs actually
get passed by the Commission, how are you holistically looking
at their interoperability? Drill down on it a little bit.
Mr. Gensler. No, no, I think it is a good question. We do
it proposal by proposal in the economic analysis. We benefit
from the public comment. And I would say we have a long
tradition of, regardless of what the comment period is, 60 days
or whatever the comment period is, when comments come in after
the comment period, we still--the staff considers it. We write
it up. We put it in, I mean, you know, if it comes in, you
know, not at the 1 day before we are finalizing it. Generally,
on average, it takes a year, year-and-a-half to finalize these
things. So I encourage people to continue to say, if you see
that interaction.
But second, we also occasionally--publically, we reopen
something, and we did that earlier this year on--there was a
security lending and a stock buyback, and we sort of reopened,
and we sort of said: Well, those are so closely interrelated.
Let us do that as well.
Senator Warner. And again, that is as you are focusing
within your purview.
Let me give you an area that I have got. You know, I think
too well-intentioned rules, but I worry about conflict. The
Chairman of the Intelligence Committee--I think the
cybersecurity issues. In my litany of things that keep me up at
night, that is one of the ones. Matter of fact, I am surprised
we have not seen more from Russia in light of the invasion of
Ukraine.
We worked in a bipartisan way really hard to get an across
the-board, mandatory, cyber incident reporting legislation
through and trying to find the right timing of when you make
that report and making sure that you do not interfere with a
criminal investigation.
You have got a similar SEC public company requirement.
Because I do believe a lot of these cyber incidents fall into
materiality--but take a few minutes, and I wanted to get to one
another quick question after this. Take a moment or two and
tell me how you do that potential interaction between something
that is outside your purview, this DHS CISA requirement, versus
your SEC cybersecurity requirement.
Mr. Gensler. It is a very good question because the
securities laws are about those investors understanding a
material risk and material events, and so we put out a
proposal, as you said, about corporate public companies making
cyber disclosure, how they manage cyber risk and when they have
a material incident--it has got to be a material incident--and
then report that within 4 days.
We have also been in conversation directly with the
Department of Justice and with the Department of Homeland
Security--you know the particular leadership there--and had
really good conversations. We included one important question
in that proposal about national security, and we could tell you
about--you know, it would take more than 50 seconds to tell you
about that, but--and working with the Department of Justice on
that.
Senator Warner. Well, the more you can, I think, spell out,
maybe not just here, but how you--the process of this
intersection between, you know, an agenda again that I
generally support, I think would make sense.
And you know, to show that, I want to use my last 30
seconds to touch on a topic that I have. You know, candidly,
your predecessor, Jay Clayton, started down this path, and you
and I have talked about a lot before and actually encourage
more action, and that is in human capital reporting. I think we
have discussed many times.
I think many of my colleagues have heard me go through this
litany about how assets on a balance sheet have changed
dramatically from, you know, tangible assets to intangible. A
lot of that is human capital. Chair Brown and I have some
disclosure legislation on this. I have been a big advocate of a
human capital R&D tax credit.
Talk to me a little bit about how you think moving forward
because I do believe human capital investment is
extraordinarily material for all these companies that say their
workforce is the most important asset. Speak to that.
Mr. Gensler. So you are right; Chair Clayton did put out a
rule. We now have 2 years of, you know, following of that rule
around human capital. We are looking at those first 2 years and
seeing what worked, what did not work, and everything.
But I know this from my days when I was on Wall Street.
When you bought or sold a company, there were those two or
three key pages with the key statistics about the workforce,
you know, turnover rates, what they got paid, were they--what
were the benefits, et cetera, what is the training like, are
they unionized. I mean, these were the key things when you buy
and sell a company. And so why shouldn't the public
shareholders also get that similar information?
And you had wrote recently about a letter that I think a
number of former SEC commissioners, from Joe Grundfest to Rob
Jackson and others, wrote, and we are taking a look at that
letter as well.
Senator Warner. Well, I would encourage you and look
forward to working with you on that.
Thank you, Mr. Chairman.
Chairman Brown. Thank you, Senator from Virginia.
Senator Daines from Montana.
Senator Daines. [off microphone.] Chairman, thank you.
Chair Gensler, glad to have you here.
Mr. Gensler. Good to see you again, Senator.
Senator Daines. [off microphone.] I want to talk about the
[inaudible]. The light is on, but nobody is home.
Chairman Brown. We did not do that on purpose, even though
you probably think we did.
Senator Daines. I hope not. I would never assume that, Mr.
Chairman.
Chairman Brown. Thank you, Senator Daines.
Senator Daines. All right, all right. Chairman Gensler, I
want to cut right to the chase here. I know some of my
colleagues have already talked about the proposed climate
disclosure rule. I have looked at it. I think it truly is
beyond unreasonable, and I would recommend it be withdrawn. The
massive burdens that it will place not just on large companies,
but also smaller companies, is going to have, I think, major
downstream impacts on the companies with whom they also do
business.
And I really want to zero in on the Scope 3 emissions
problem. The question: Do you really think it is reasonable to
ask companies to collect, analyze, reconcile, report on things,
literally, such as whether the company car of an employee is a
Tesla or a pickup? I mean, that is, in essence, what the
Commission is doing when it expanded now the Scope 3 rules in
emissions.
Mr. Gensler. So, Senator, what we have right now in America
is that we have many companies, hundreds, that are disclosing
greenhouse gas emissions to the public, and they are including
also--not all of them, but many of them--something around the
Scope 3. So this is--for the public listening, this is the
downstream or your suppliers and the like.
And so what we are trying to do is to bring some semblance
to that, some standardization. So what we have said is, it is
not a mandate, but if you have a commitment, if you have
publically said you are managing it or if you publically feel
it is material----
Senator Daines. Just to make sure I am--excuse me. So it is
not a mandate? So the rule would give the companies leeway
whether they need to expand to Scope 3 or not?
Mr. Gensler. Yes. It is only a proposal. The adoption has
still not happened. But the proposal was a mandate on what was
called Scope 1 and Scope 2 and then we took a different
approach on Scope 3. And we said if the company deems that it
is material or if the company already has made a public
commitment to manage Scope 3, like if they have--and that is
totally voluntary on their part. Then we said you had to
estimate.
Look, we have gotten a lot of comments on this, and there
is no goal to like touch--we had a good conversation with
Senator Tester and Senator Rounds. There is no goal to touch
farmers in any of the states that you represent, or ranchers,
and Senator Lummis----
Senator Daines. So would that be carved out explicitly
because it is--I mean, when you talk Scope 3, it is a very,
very wide net as you know.
Mr. Gensler. But it is from the public company's point of
view. Are you making a commitment to the public on how you are
managing it? This public company. And then how are you
estimating it? And we did say, estimating it. We said there was
a safe harbor, so we put some legal protections on it.
But again, we are looking at these 14,000 comments. We are
trying to balance this out.
The one thing is that we have to ensure that the public
companies that are saying this or that about Scope 3 are not,
you know, frankly, misleading the public.
Senator Daines. Yeah. Well, I hope you hear us out. I think
you have heard a lot of concern from the Committee here on both
sides on it.
Mr. Gensler. And I look forward to more conversations.
Senator Daines. Yeah. I have just watched--we all watch--
what is going in Europe and California, where it just moves
from a passion for climate change to go into climate insanity
in terms of dealing with baseload issues and creating truly
existential threats to their economies, their national
security, and I just do not want to see our country follow the
same path that we have seen in Europe. I spend a lot of time
talking to European leaders, and they wish they had a redo on
this.
Mr. Gensler. Yeah. I actually think this is one of the
reasons that we could come together. And we want something here
in the U.S. that we adopt a rule and it is sustained in court
because, if we do not, large U.S. issuers will probably have to
comply with that European regime because the European regime
says if you have more than 150 million euro of sales in Europe
you have got to comply with their regime.
Senator Daines. Yeah. Well, they are going to have a
really, really tough winter, and we say our prayers at night
and pray for a warm winter in Europe.
Chairman Gensler, I want to talk about BDCs for a moment,
business development companies. They play an indispensable role
in providing credit to middle market businesses in Montana as
well as around the country. One pressing issue that has
impacted BDCs and investors for several years is the
application of the SEC's Acquired Fund Fees and Expenses
(AFFE)--you are getting acronyms--rules to BDCs. But simply,
when you apply the AFFEs to BDCs, it over-counts the true cost
of investing in BDCs, thereby, I think, misleading investors.
Senator Menendez and I have introduced the Access to Small
Business Investor Capital Act, which permits BDCs to move 100
percent of those AFFE disclosure to a footnote in lieu of a fee
table.
Let me just cut to the chase here on the question. Does the
SEC plan to fully address the misleading disclosure that AFFE
creates for BDC investors in lieu of the current unworkable
rule the SEC has proposed, and would you agree that BDC
investors deserve the parity in disclosure with REITs. That is
a lot there.
Mr. Gensler. There is a lot there. Why don't I say this; I
look forward to helping with technical assistance on your bill.
But also, on business development companies being owned by
other funds, mutual funds, there is transparency in what--there
was a 2006 rule on this, way before I got here, that there was
this transparency that the investors in the mutual fund need to
sort of see all those costs and rolling up in those costs, and
I think that is what you are trying to address in your statute.
Senator Daines. Right.
Mr. Gensler. Yeah.
Senator Daines. Thank you. I am out of time here.
Is it Chairman Toomey here or it is Chairman Reed? Oh,
Chairman Brown is still there. Chairman, I did not see you. I
am good. Thank you.
Chairman Brown. Senator Reed from Rhode Island is
recognized.
Senator Reed. Thank you very much, and Mr. Chairman,
welcome. Senator Cortez Masto and I have introduced
legislation, S. 4857, Private Markets Transparency and
Accountability Act. Basically, our legislation would require
the Nation's largest, most important private companies to
register with the SEC, and they would then be subject to
appropriate disclosure requirements. I think it is necessary
because we are seeing the decline in public registrations and
an extraordinary increase in private companies that are
controlling some public companies, some other companies.
Can you describe the main differences between the public
markets and the private markets when it comes to investor
protection?
Mr. Gensler. We benefit in this country, vibrant capital
markets, both public markets and private markets. My dad never
had a company that would be caught up in your bill, but he had
a small business that had 30, you know, employees. And so I
think that has been very helpful.
But there is a difference in disclosure and a difference
in, as you said, investor protection because Congress gave this
Agency a remit about those public companies and to protect
against--that the disclosure is there, that it is truthful, and
we protect against fraud and manipulation. That is, of course,
different if it is a private company. Not that my dad would
have done this, he was buying and selling the stock with his
partners.
Senator Reed. But I mean, again, I think in the--when the
SEC came about, most of the private companies were relatively
small, family owned, and that is not the case today. Huge
financial----
Mr. Gensler. No, no. It is estimated by outside public
sources there is about 1,200 companies in the U.S. that are
what is called ``unicorns,'' that are worth more than a billion
dollars and that the total market value is about $4 trillion.
Senator Reed. And the disclosure and the investor
protections for those companies are not at the same level of
strength as public companies?
Mr. Gensler. It is interesting. It is not--it is not under
our remit, but the disclosures to the holders or whatever, you
know, is privately negotiated between the holders and those
companies, and so it is not at the same level.
Senator Reed. I just want to quickly shift gears a bit
because this is the 20th anniversary of the Sarbanes-Oxley Act.
I think you are quite familiar with that. And it was a response
to the scandals of Enron and WorldCom, and it demonstrated why
investors need gatekeepers in our financial markets, especially
accountants. But one concerning trend is that the big four
accounting firms provide also lucrative consulting services to
public companies that they are also responsible for auditing.
So what steps is the SEC taking to ensure that auditors
prioritize independence over seeking non-audit revenue?
Mr. Gensler. Yeah, I thank you because I was sitting in the
seats behind the Chair and Ranking Member when it was Senator
Graham and Senator Sarbanes sitting there.
Senator Reed. I was over there.
Mr. Gensler. And you were over here. But I think what
Senator Sarbanes--and Senator Graham voted for that bill,
actually. So what they tried to do in that bill was to ensure
that there was some separation between the audit function and
consulting and so forth.
I have asked--because I think that there has been some
lessening of that separation over those 20 years, I have asked
a number of things, the Office of Chief Accountant at the SEC,
and I have also asked the board at the PCAOB. I have told all
five of the members there, could you put on your agenda as well
to update the standards, the PCAOB standards and the SEC
standards, about this separation and the independence? And I
also know our acting Chief Accountant, Paul Munter, has given
some speeches on this recently and leaned into this.
Senator Reed. Just a final question, there have been
several major cases with accounting firms over the past year,
ethical lapses, professional problems, but those findings are
basically not disclosed to the public. They are maintained by
the regulatory agency. And Senator Grassley and I have
legislation that would make them public, and I think that is
important. I think it is important to know whether a firm has
been engaged in----
Mr. Gensler. I think it would be. It was one of the
compromises laid between Senator Enzi and Senator Sarbanes as I
remember it.
Senator Reed. So, thank you.
Chairman Brown. Thank you, Senator Reed.
Senator Warren from Massachusetts is recognized.
Senator Warren. Thank you, Mr. Chairman.
So in March, the SEC proposed a climate risk disclosure
rule that takes a big step toward increasing the efficiency of
the economy and the financial markets by requiring companies to
inform investors about the climate-related risks that affect
their businesses. Now as part of this rule, the SEC proposes
that companies disclose their greenhouse gas emissions and
companies' submissions are classified into three different
categories called Scopes.
So, Chair Gensler, just so we can set a baseline here, let
us run through an example. Let us say I am Exxon. My Scope 1
emissions would be from things like my company's vehicles and
methane leaks that occur at the wellhead of the wells that I
own. Scope 2 emissions would be those from electricity I
purchase, for example, in order to power my operations. Scope 3
would cover upstream emissions from the production of what I
buy, like the chemicals I use to refine my oil into gasoline or
diesel fuel and the downstream emissions from what I sell, like
the refined gas or the diesel my customers buy at the pump. Do
I basically have that right, Chair Gensler?
Mr. Gensler. Yes.
Senator Warren. Good. So you need all three Scopes because
otherwise a company could just stop doing the filthiest part of
their business and hire some smaller, nonreporting company to
do the same filthy work, and then report themselves as greener.
So, Chair Gensler, for a fossil fuel company like Exxon,
what percentage of their total emissions are Scope 3 emissions?
Mr. Gensler. I suspect you might know that better than I. I
have not looked, but it is often over half. It could well be in
some companies--I do not know Exxon. Some companies, it is as
much as 90 percent.
Senator Warren. Well, you are close on that number.
According to an S&P global analysis, about 88 percent of the
emissions of these fossil fuel companies like Exxon are Scope 3
emissions. So in other words, oil and gas companies have Scope
3 emissions that, on average, as you say, it is about 90
percent of their total emissions.
Now the rule the SEC proposed in March already gives
companies, in my view, way too much wiggle room in disclosing
Scope 3 emissions, but evidently, that wiggle room is not
enough benefit for Exxon. They and their trade association, the
American Petroleum Institute, have been fiercely lobbying the
SEC to drop Scope 3 disclosures entirely from the final rule.
So Exxon wants to change the SEC proposal so the company
would have to tell about emissions when their own work trucks
were on the road but not about emissions from all the other
trucks that are fueled by Exxon diesel when they are on the
road, or, to say it another way, companies like Exxon do not
want to have to tell investors or the public about nearly 90
percent of their emissions.
And, if Exxon and the American Petroleum Institute get
their way, investors would remain in the dark about how
companies would be affected down the line when policymakers get
serious about tackling climate change and, for example, put
significant restrictions on trucks that are powered by fossil
fuels.
So, Chairman Gensler, if a company discloses only 12
percent of their total emissions to investors, do you think
that investors have all of the information that they need in
order to evaluate whether or not that company is well
positioned to succeed in a greener economy with much stricter
regulations on emissions?
Mr. Gensler. So I look at it this way, that many companies
today are already making commitments about all three of these
Scopes. More are making commitments about Scope 1 and 2, but
many are also making commitments. And our proposal was, if you
are making a public commitment about how you are managing it,
you ought to measure it because how do you manage that which
you do not measure. And then we also said, if it was material,
using a Supreme Court test of materiality, that you would have
to measure it. But we did get a lot of comments on this; you
are right.
Senator Warren. So I understand this, but the question I am
asking you is actually much narrower. It is a straightforward
investor question. If climate emissions are going to become
more important in valuing businesses as the regulatory
environment changes, if you only have to disclose 12 percent of
your emissions, does an investor have the information they need
to make a good investment decision?
Mr. Gensler. So again, I will quote from our comment file,
if we look at the top three or four hundred investor letters
that we got that manage tens of trillions of dollars of assets,
most--I do not remember the percent--most are supportive to
have all three Scopes part of this disclosure. So that is
straight from the investors rather than from me.
Senator Warren. Actually--and I think that is exactly the
right point because for months now the big banks, the pension
funds, and the investment management companies have been asking
for this Scope 3 information because it is crucial to making
good investment decisions.
I appreciate that you are working to protect investors and
not some particular industry because that is the job of the
SEC, and we are counting on you to do that.
Mr. Gensler. Thank you, Senator.
Senator Warren. Thank you, Mr. Chairman.
Chairman Brown. Thank you, Senator Warren.
Senator Toomey has a couple, the last two questions, a
couple questions.
Senator Toomey. Thank you, Mr. Chairman.
You know, I have made no secret about my concern that there
are people in this Administration, in this Congress for that
matter, who wish to use financial regulators as the tool by
which they will advance a liberal agenda, and I have criticized
this, among other reasons, because it is so undemocratic,
right. It is so undemocratic to have unelected, unaccountable
agency bureaucrats making the tough decisions that should be
made by the accountable parts of our Government. I have
criticized the Fed, the CFPB.
And, Mr. Chairman, I am putting you in this category, and
the climate disclosure rule, I think, is the example. You know
very well the Supreme Court held in the West Virginia v. EPA
case that the EPA lacked the authority under the Clean Air Act
to regulate greenhouse gas emissions. In coming to that
conclusion, they relied on the Major Questions Doctrine. In
that, the Court held that given the economic and political
significance of the asserted authority the Agency must point to
clear congressional authorization.
Now among the factors they used to decide that something is
a major question, yeah, the major question, the Court noted it
involved a novel approach, it involved technical and policy
expertise not traditionally needed by the Agency, such a
consequential decision is unlikely to have been left by
Congress to Agency discretion, and the Agency had adopted a
scheme that Congress had considered and rejected multiple
times.
Mr. Chairman, it looks to me that the climate rule that you
have proposed, under the Major Question Doctrine, just does not
have the congressional authority. So my question is: In light
of the EPA v. West Virginia case, have you given any
consideration to rescinding that rulemaking?
Mr. Gensler. Thank you, Senator. We take seriously the
courts and particularly the Supreme Court, and so we are
considering 14,000-plus comments in that comment docket, and we
are considering it in light of our authorities and the law. I
would say most of the comments are supportive.
Investors are using this information now, and they want the
information. And I think it does fit into our 80- or 90-year
history of how we do disclosures, that the disclosures are
already being made. And so what I just want to finish on is I
think we have a role to ensure that there is not only investor
protection but, as the law said, fair dealing, that the actual
disclosures are not misleading and the like.
Senator Toomey. Well, as I predicted, I think if you go
ahead with something substantively similar to the proposed
rule, you are going to find a very unsympathetic Court with
regard to the authority that you have.
Chairman Brown. Thank you, Senator Toomey.
Thank you, Chair Gensler, again, for joining us.
For Senators who wish to submit questions for the record,
those questions are due 1 week from today, Thursday, September
22nd.
Chair Gensler, per our Committee rules, we ask you respond
to any questions within 45 days from the day you receive them.
Thank you again.
The Committee is adjourned.
[Whereupon, at 12:06 p.m., the hearing was adjourned.]
[Prepared statements, responses to written questions, and
additional material supplied for the record follow:]
PREPARED STATEMENT OF CHAIRMAN SHERROD BROWN
Welcome back Chair Gensler.
Workers and their families don't measure the economy by the stock
market, and neither should we.
It's why in the Senate and in the Biden administration, we are
working to create an economy that delivers results for people who get
their incomes from a paycheck, not an investment portfolio--rising
wages and good-paying jobs and lower costs.
That means fighting the corporate price gouging that hurts
consumers, and the unfair labor practices that hurt workers.
It means investing in American manufacturing and the workers who
drive it.
And it means making sure our financial watchdogs keep our markets
and economy stable.
At the SEC, that includes going after companies that try to cheat
the market. It means strengthening corporate disclosures to stay ahead
of risks like climate change. It means looking into the practices of
private equity and hedge funds, as they stretch their tentacles into
more and more areas of our economy.
It's been an eventful year.
This summer, the Senate confirmed President Biden's two nominees to
the SEC. I know both new Commissioners got right to work on the many
issues before the agency. And the Commission and its dedicated staff
have been busy.
Republicans on this Committee have bellyached about your ambitious
agenda.
If Wall Street and its allies are complaining, it probably means
you're doing your job.
You put Americans' savings first and you focus on fairness and
transparency--two concepts critical to making sure our markets work for
everyone, not just insiders and corporate executives.
The SEC must continue making enforcement a priority.
Bad actors are always coming up with new schemes to separate people
from their hard-earned money, or to cheat the rules to gain a little
more for themselves.
Under your watch, the SEC has increased prosecutions for insider
trading, which under the Trump administration had fallen to the lowest
level in a generation.
In April, this Committee considered a Reed and Menendez bill that
would outlaw insider trading in statute. The House has already passed a
similar bill. Now the Senate must pass it.
Last month, we saw the successful results of bipartisan work of our
Committee Members to improve transparency and fight fraud.
In 2020, Sens. Kennedy and Van Hollen pushed for the passage of the
``Holding Foreign Companies Accountable Act'', a bill to stop the U.S.
stock exchange trading of foreign companies with China-based auditors
that refused to comply with our oversight laws.
Because that law jumpstarted negotiations, the Public Company
Accounting Oversight Board (PCAOB) signed an agreement with Chinese
authorities that will--finally--allow auditors to begin inspections.
In March, President Biden signed an Executive order establishing a
whole-of-Government strategy for digital assets.
While agencies across our Government look at how we respond to the
growth of crypto, and best protect people's money, we know the SEC
continues to enforce the law-going after cryptotokens that violate
securities laws, shutting down crypto Ponzi schemes, and charging
insider trading crimes in crypto.
Over the last year in this Committee, we have looked at how crypto
assets are used in scams and fraud, and play a role in illicit finance.
We also heard from the Treasury Under Secretary testify on the
President's Working Group report on stablecoins.
This morning, the Agriculture Committee is considering a crypto
bill sponsored by Sens. Stabenow and Boozman that focuses on digital
commodities. I appreciate their work to create regulation in the crypto
space.
It's critical that we are careful and deliberate in drawing
jurisdictional lines.
In this kind of regulation, we have to prevent gaps and close
loopholes that can be exploited or abused. That's not easy, and it's
why action by the Agriculture Committee and CFTC is welcome. But it's
not enough.
When Congress wrote Dodd-Frank, we fixed the problems in the
oversight of the over-the-counter derivatives market. That's a lesson
we need to remember when it comes to crypto--all our regulators need to
work together, and to make sure investors, consumers, and market
stability comes first.
The SEC's work on climate risk disclosure is also an important
example of how to improve the market's understanding of risks and to
provide transparency and comparability. Clarity and uniformity are key.
If only a subset of companies provides disclosure, and they do so
in whatever form they want, that doesn't serve anyone. Investors
outside the U.S. already benefit from standardized climate risk
disclosures; it's time the U.S. market did as well.
The SEC's recent rule proposal to require more disclosure about
corporate stock buybacks will also bring much-needed transparency to
the market.
We know stock buybacks are a big problem--they distort the market,
and they funnel profits to executives at the expense of long-term
investment in workers and innovation.
And the process allowed for these buybacks has only made them more
manipulative. For decades, companies have been able to announce stock
buybacks to juice their stock price, but then only provide details
months later on how, when, and even whether they ever completed their
plans.
Under the SEC's new proposal, the market and the SEC would
understand when companies are buying their stock, and if executives are
buying or selling at the same time.
Taken together with our unprecedented step in the Inflation
Reduction Act to finally tax these buybacks, these are the first real
steps we've seen in years to rein in this Wall Street scheme.
Chair Gensler, I look forward to hearing more about other ways the
SEC is working to hold bad actors accountable, and protect Americans
who invest their hard-earned money in our markets.
______
PREPARED STATEMENT OF SENATOR PATRICK J. TOOMEY
Mr. Chairman, thank you. And welcome, Chairman Gensler.
The SEC has a critical role to play in protecting investors,
maintaining fair, orderly, and efficient markets, and facilitating
capital formation. Unfortunately, some of the SEC's recent actions--and
inactions--raise concerns about how well it's carrying out this
important mission.
Take for example the SEC's handling of crypto lending platforms,
like Celsius and Voyager. Celsius and Voyager were offering interest
rates as high as 18 percent if customers would lend their digital
assets to them.
The firms would then lend that crypto to other larger investors to
make short-term bets on cryptomarkets. But once the crypto selloff
began, many borrowers couldn't pay their debts, and these platforms
froze customer accounts.
The SEC took enforcement action against BlockFi for similar
activities last winter, yet somehow let Celsius and Voyager continued
through this spring, when both companies blew up and found themselves
in bankruptcy, with investors staring at billions in losses. Where was
the SEC?
And where's the SEC been in clarifying the rules of the road for
cryptomarket participants? The Chairman insists in his written
testimony that ``the vast majority'' of cryptotokens are securities.
But he has also acknowledged Bitcoin is not. Presumably that's
because Bitcoin is so decentralized. That naturally raises the
question, where on the decentralization continuum does a token cease to
be a security?
Most of these tokens don't even have a financial claim on the
issuer. Doesn't that make these tokens very different from the vast
majority of securities?
And if the Chairman is right that most tokens should be considered
securities, then as he himself states in his written testimony, ``it
follows that many crypto intermediaries . . . are transacting in
securities and have to register with the SEC in some capacity.''
However, crypto transactions typically can be settled in real-time on-
chain and without intermediaries.
As a result, crypto intermediaries often serve different customer
needs, have different business models, and pose different risks than
traditional securities intermediaries. That raises the question, what
is the crypto-specific roadmap for these crypto intermediaries to
register?
Stepping back, there's a larger problem here. As Bloomberg
columnist Matt Levine put it: ``[Chairman] Gensler's posture is that he
should be in charge of writing the rules for crypto, but not write
them. I don't see how that can work.'' I agree.
Given the novel nature of these tokens, Congress ought to step in
to provide clarity. In particular, we need to revisit the definition of
``security'' as part of a larger effort to tailor a regulatory
framework that is calibrated to the unique risks and activities of the
cryptomarket?
As I've said, cryptotokens have varying degrees of
decentralization, usually do not have a financial claim on the issuer,
and typically can be settled in real-time without intermediaries. These
are important differences from traditional securities. And they merit a
clearly stated and tailored regulatory framework.
While the SEC has failed to provide regulatory clarity in the
cryptomarkets, it has been issuing numerous controversial and
burdensome rules and proposed rules in the ordinary securities market.
At the top of the list is the SEC's climate disclosure rule.
Public companies are already legally required to disclose material
climate change information. The proposed rule however would go much
further to require disclosure of exceedingly extensive global warming
data.
This data will be enormously expensive to collect, but almost none
of it will be material to a business's finances. For annual reports
alone, the SEC estimates that aggregate external compliance costs for
issuers increases from $1.9 billion per year to $5.2 billion per year
as a result of the SEC's proposed climate disclosure rule.
The SEC itself estimates that the external compliance cost of a
company going public will increase by more than five times, at a time
when excessive regulatory costs are resulting in ever fewer companies
going public. The cost of compliance will be more material to the
investor than the information itself.
But of course the climate disclosure rule isn't about an informed
investment decision. It's about equipping climate activists with data
to run political pressure campaigns against companies, often to the
detriment of shareholders.
The endgame is to discourage capital investment in oil, natural
gas, and other traditional energy industries. We've seen how that
worked out for Europe.
The SEC is wading into controversial public policy debates that are
far outside its mission and its expertise and without the legal
authority to do so. In doing so, the SEC risks politicizing the agency,
slowing economic growth, increasing inflation, and even undermining
national security.
Given the importance of these issues, Banking Committee Republicans
have written to the SEC asking basic questions about how the SEC
developed the climate disclosure rule. Instead of providing real
answers, the SEC has unacceptably stonewalled.
The SEC may not want to answer to Congress on its climate
disclosure rule. But, ultimately, the SEC will have to answer to the
courts, which should make it nervous.
The Supreme Court has repeatedly held that ``Congress . . . does
not alter the fundamental details of a regulatory scheme in vague terms
or ancillary provisions--it does not, one might say, hide elephants in
mouseholes.'' This summer the Supreme Court applied this sensible
principle in West Virginia v. EPA.
There it ruled that the Executive branch and its agencies, cannot
use novel interpretations of existing law to pretend they have legal
authority to support sweeping policy changes, including on climate
change, that Congress never intended. Well, that's precisely what the
SEC appears to be trying to do with its climate disclosure rule.
The SEC should consider itself to be on notice by the Court that
the separation of powers still exists and will be upheld.
PREPARED STATEMENT OF GARY GENSLER
Chair, U.S. Securities and Exchange Commission
September 15, 2022
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Additional Material Supplied for the Record
LETTER SUBMITTED BY NATIONAL ASSOCIATION OF MANUFACTURERS, SECURITIES
INDUSTRY AND FINANCIAL MARKETS ASSOCIATION, AND U.S. CHAMBER OF
COMMERCE
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
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