[Senate Hearing 118-475]
[From the U.S. Government Publishing Office]
S. Hrg. 118-475
OVERSIGHT OF THE U.S. SECURITIES AND
EXCHANGE COMMISSION
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HEARING
BEFORE THE
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED EIGHTEENTH CONGRESS
FIRST SESSION
ON
EXAMINING THE WORK, AGENDA, AND OVERSIGHT OF THE U.S. SECURITIES AND
EXCHANGE COMMISSION
__________
SEPTEMBER 12, 2023
__________
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
57-252 PDF WASHINGTON : 2025
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
SHERROD BROWN, Ohio, Chair
JACK REED, Rhode Island TIM SCOTT, South Carolina
ROBERT MENENDEZ, New Jersey MIKE CRAPO, Idaho
JON TESTER, Montana MIKE ROUNDS, South Dakota
MARK R. WARNER, Virginia THOM TILLIS, North Carolina
ELIZABETH WARREN, Massachusetts JOHN KENNEDY, Louisiana
CHRIS VAN HOLLEN, Maryland BILL HAGERTY, Tennessee
CATHERINE CORTEZ MASTO, Nevada CYNTHIA M. LUMMIS, Wyoming
TINA SMITH, Minnesota J.D. VANCE, Ohio
KYRSTEN SINEMA, Arizona KATIE BOYD BRITT, Alabama
RAPHAEL G. WARNOCK, Georgia KEVIN CRAMER, North Dakota
JOHN FETTERMAN, Pennsylvania STEVE DAINES, Montana
Laura Swanson, Staff Director
Lila Nieves-Lee, Republican Staff Director
Elisha Tuku, Chief Counsel
Amber Beck, Republican Chief Counsel
Cameron Ricker, Chief Clerk
Shelvin Simmons, IT Director
Pat Lally, Assistant Clerk
(ii)
C O N T E N T S
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TUESDAY, SEPTEMBER 12, 2023
Page
Opening statement of Chair Brown................................. 1
Prepared statement....................................... 40
Opening statements, comments, or prepared statements of:
Senator Scott................................................ 3
Prepared statement....................................... 41
WITNESS
Gary Gensler, Chair, U.S. Securities and Exchange Commission..... 5
Prepared statement........................................... 42
Responses to written questions of:
Chair Brown.............................................. 51
Senator Scott............................................ 54
Senator Britt............................................ 79
Senator Crapo............................................ 83
Senator Fetterman........................................ 85
Senator Kennedy.......................................... 87
Senator Lummis........................................... 92
Senator Menendez......................................... 93
Senator Rounds........................................... 95
Senator Tillis........................................... 100
Additional Material Supplied for the Record
Joint Trades Letter.............................................. 101
(iii)
OVERSIGHT OF THE U.S. SECURITIES AND EXCHANGE COMMISSION
----------
TUESDAY, SEPTEMBER 12, 2023
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:01 a.m., in room SD-538, Dirksen
Senate Office Building, Senator Sherrod Brown, Chair of the
Committee, presiding.
OPENING STATEMENT OF CHAIR SHERROD BROWN
Chair Brown. The Senate Committee on Banking, Housing, and
Urban Affairs will come to order.
Welcome back, Chair Gensler.
Americans count on our markets to provide for their
futures. For far too long, our markets and financial regulators
have answered to the interests of the powerful few on Wall
Street--big banks, private fund managers, corporate
executives--looking to keep profits for themselves instead of
investing in their workers, in innovation, and in American
prosperity.
New technologies risk further concentrating power on Wall
Street at the expense of American savers. Meanwhile, fraudsters
are use cyberattacks and ``deep fake'' AI technologies to scam
American savers. Faced with that unfair playing field that
favors entrenched, wealthy interests over hardworking
Americans, the SEC has its work cut out for it to protect
families whose hard-earned savings are invested in the market.
Many on Wall Street have suggested that the SEC has been
moving too fast recently. We have heard all the complaints. I
am sure we will hear them again today--too many rules, too
fast, too hard to comply with. But America's markets are the
greatest in the world because we have strong investor
protections and because we have effective regulators at the SEC
and elsewhere who work to make sure we have transparent, fair,
and honest markets that Americans deserve.
We know all too well what happens when regulators, at the
behest of lobbyists and the politicians who always do their
bidding, ignore changes or are too slow to respond. It was 15
years ago this week that Lehman Brothers collapsed, putting us
in the middle of a financial crisis because industry ran wild.
Look at the private funds rule the SEC recently finalized.
Private equity and hedge funds managed tens of trillions of
dollars in assets at the end of last year for pension funds and
endowments and now even some retirement savers. Private equity
firms alone control somewhere between--this is incredible. And
I use that word sparingly because it is overused. But where 15
and 20 percent of our whole economy, private equity firms
control that.
That number is going up every year. But all the Americans
whose savings are controlled by these opaque firms haven't been
able to get much information about how they are using people's
money. Fees, comparable performance data, independent audits,
disclosure of conflicts of interests by fund managers--
Americans have been in the dark about all of it, until now. The
private funds rule will change that--thank you--and force them
to tell people how much money these private equity firms are
charging.
It should be no surprise that the groups that complained
that the proposed rule was too strong, too hard to comply with,
and unnecessary waited only days before running to their venue
of choice, the Fifth Circuit Court of Appeals. Of course, it is
always the Fifth Circuit, the most extreme and partisan circuit
in America. And always willing to do special interest bidding,
especially Wall Street's bidding.
Same playbook we see over and over. Wall Street corporate
interests trying to use the courts to go around the public.
What else are these companies trying to hide? Trillions in
stock buybacks, for one thing. It is why the SEC update of
corporate buyback disclosure will also provide much-needed data
on how executives are allocating corporate resources.
That increased transparency will combine with our first-
ever tax on corporate stock buybacks. Together, they should
encourage companies to stop throwing trillions of dollars at
buybacks that enrich executives, instead start investing in
their workers and in innovation.
The Commission also took important steps to address fraud
and increase executive accountability. Under your leadership,
Mr. Chair, the SEC finally took steps to complete two
safeguards required under Dodd-Frank. The first was proposing a
rule prohibiting conflicts of interest in the market for
mortgage-backed and asset-backed securities. That sounds
technical. During the financial crisis of 2008, Wall Street
banks, predatory hedge funds bet against the U.S. housing
market and caused billions in damage.
The second Dodd-Frank provision requires companies to work
to claw back compensation from executives who earned bonuses
based on flawed financial results. This Committee has been
working to enhance executive accountability by recently
passing--and I thank the Ranking Member for this, too--by a
vote of 21 to 2, a bipartisan bill to hold bank executives
responsible when they mismanage their banks. I look forward to
the RECOUP Act passing the Senate and becoming law.
In the past year, the SEC also advanced transparency by
requiring companies to notify the market when they experience
cyberattacks. We know this is a growing risk to every industry.
Now there is a standard that ensures investors and policymakers
know when these potentially devastating hacks occur.
Of course, the SEC has continued to pursue enforcement
actions against all kinds of scam artists, those who target
vulnerable investors, people who try to get away with insider
trading, and crypto fraudsters. You have been busy. There is
more work to do to protect American savers.
And we know the SEC is looking ahead at emerging risks
posed by new technologies, including machine learning and
artificial intelligence. The SEC must make sure that brokers
and investment advisers put customers first when they use new
technologies. This Committee will be discussing the impact of
AI on financial markets and consumers in the coming weeks.
I am eager to see SEC finalize its climate disclosure rule.
There has been significant opposition to the proposal--who
would have expected otherwise--but the transparency it will
provide will be valuable to investors. Just last week, this
Committee heard testimony about the challenges in the property
insurance market. The increase in climate events every year--
fifteen $1 billion or more events so far this year, increasing
all the time--it is well documented.
These climate events affect businesses, too. That
destruction hits factories and infrastructure and puts workers
at risk. So it is clear why investors are demanding this
information. They deserve to get it. And we only need to look
to events in the crypto markets in the past year to see what
happens when markets lack transparency and conflicts go
unchecked. Americans lose money.
Since you testified last year, Mr. Chair, the FTX collapse
showed how dangerous crypto can be. But FTX wasn't a lone bad
apple, it was just the most explosive example of the problems
in crypto. It seems like every day, before and after FTX
collapsed, there is another crypto scam, hack, or insider
taking advantage of people and another few million dollars
lost. That is because the problems we saw at FTX are everywhere
in crypto--the failure to provide real disclosure, the
conflicts of interest, the risky bets with customer money that
was supposed to be safe.
FTX was just the biggest and the ugliest. For consumers, it
adds up to billions of dollars gone. Meanwhile, bad actors keep
flocking to crypto. They use it to launder money, to evade
sanctions, to fund crime and human trafficking and terrorism.
We need to protect workers and families in these markets.
We need to clean up the scams and fraud. As Congress considers
digital asset legislation, I am glad the SEC is using its tools
to crack down on abuse and enforce the law.
Last, Chair Gensler, as our economy and markets move
forward, SEC must keep moving forward, put American savers
first. Americans who work hard and scrimp to save for their
families' futures deserve to invest their savings in markets
that are fair and honest and transparent.
I look forward to hearing more about how the SEC is working
to protect investors and American workers.
Senator Scott.
OPENING STATEMENT OF SENATOR TIM SCOTT
Senator Scott. Thank you, Mr. Chairman.
Thank you, Chair Gensler, for being with us today.
I have been calling for this hearing since February 14,
when the Committee held an oversight hearing on the FTX crypto
crash. A lot has happened since your appearance last September.
We experienced several bank failures, and in response, this
Committee called up the relevant financial institutions and
regulators to hold them accountable for their actions. But when
it comes to the SEC, we have had to wait a whole year to speak
with you in person. Even when a company like FTX collapses, we
still have to wait.
Complete and timely attention to congressional inquiries is
critical to ensuring independent agencies remain transparent
and accountable to the American people. Yet sadly, your agency
has fallen short on this obligation to be transparent and
responsive to congressional oversight.
I have serious concerns with the way you are leading the
SEC. The U.S. economy and, more specifically, our capital
market system is the global gold standard and one of our
country's greatest strategic and competitive advantages over
our peers and our adversaries. However, the United States can
only retain these benefits if our regulatory environment
empowers budding entrepreneurs to innovate, launch, and grow
new job-creating ventures.
America's global competitive edge is innovation and the
American spirit to create. As SEC chair, your goal should be to
fuel competition and innovation in the marketplace and expand
the ability of Americans from all walks of life--whether that
be a Boeing aircraft mechanic in North Charleston or a soybean
farmer in Fort Dodge, Iowa--to access a wide spectrum of
investment options for their hard-earned dollars.
Without pro-growth regulations, we are limiting
opportunities for our kids, and our kids' kids, from being able
to take control of their own financial futures. That is why it
is especially troubling that, under your leadership, the SEC
has failed to implement these types of pro-growth rules.
Instead, your agency has churned out a seemingly endless
assembly line of new and unneeded regulatory hurdles to capital
formation and market access.
Let me go through just some of those rules. First, the
compliance burdens of your proposed climate disclosure rule are
expected to quadruple the cost of being a public company. And
that is just for one single rule.
Your tax on private markets through the private funds rule
will hurt small businesses and push small and diverse fund
managers out of the market, ultimately limiting jobs and
opportunity for many in the local economy.
Meanwhile, your complex proposed overhaul of equity market
operations will harm market access for retail investors and
increase firms' cost of capital, especially for small- and
medium-sized businesses. You have issued several proposals
aimed at reworking the regulatory regime for the open-end fund
industry, including mutual funds used by millions of America's
retirement savers, while providing tissue paper thin rationale
for why these reforms are needed.
Despite it being labeled a rule on artificial intelligence,
your power grab to regulate emerging and existing
technologies--even Excel spreadsheets--is beyond the SEC's
scope and will ultimately stifle innovation.
Finally--and I certainly could go on with more--but your
proposed revisions to the current rules for safeguarding
customer assets are so overreaching you have placed your fellow
regulators at the CFTC, the Fed, and Treasury between a rock
and a hard place. These proposals and rulemakings will have a
tremendous effect on our capital market system. Yet under your
leadership, the SEC has failed to conduct thorough cost-benefit
analysis, much less look at the overall impacts of these
proposals, and has limited the time the public can have, the
time to analyze and then comment on these rules in the
proposals.
This is kind of like using all your draft choices to pick a
quarterback and forgetting about the offensive line.
Rulemakings must be justified and supported by commonsense
economic analysis, which brings me full circle.
Rulemakings must be done in a thorough, transparent manner,
which includes responsiveness to congressional oversight,
including from the minority Members of this Committee. The
American people have a right to know what their Government is
doing, and your agency's blatant refusal to respond to our
constitutionally mandated oversight represents a dereliction of
your duties to the American people.
A few final thoughts before I close. I think opportunity
can exist for all investors, and it should. Throughout my time
in Congress, I have prioritized enacting policies that open
more doors to opportunity for future generations and give
Americans in every corner of the United States the chance to
better their economic standing and build generational wealth.
It is clear under this Administration and under your time
as SEC chairman, that regulation, not innovation, is the
preferred medicine for every perceived policy injury. This
should not be the case.
I look forward to your testimony and then our discussion on
these questions.
Chair Brown. Thank you, Ranking Member Scott.
I will introduce today's witness. We will hear from Gary
Gensler, the chair of the Securities and Exchange Commission.
Chair Gensler, please proceed.
OPENING STATEMENT OF GARY GENSLER, CHAIR, U.S. SECURITIES AND
EXCHANGE COMMISSION
Mr. Gensler. Thank you so much, Chairman Brown, Ranking
Member Scott, and Members of the Committee.
It is so good to be back in front of you, and thank you for
inviting me here today. As customary, I would like to note that
my views are my own as chair of the SEC. I am not speaking on
behalf of my fellow commissioners or SEC staff.
For 90 years, the Federal securities laws and our work to
oversee them have played a crucial role for the public, both in
good times and in times of stress, and the core principles of
U.S. securities market regulation have contributed to economic
success. I find Ranking Member Scott and I probably agree on
this, is that it really has contributed to our economic success
and our geopolitical standing, the success of our capital
markets.
At this remarkable agency, we serve investors building for
a better future and issuers on the other side of the market
raising for their innovations and their ideas. It is about a
$100 trillion capital market in told. And the essence of this
is captured in our three-part mission--to protect investors on
one side, facilitate capital formation on the other, and then
what is in the middle? The markets--fair, orderly, and
efficient markets.
And the SEC is also a cop on the beat watching out for your
constituents. The dedicated staff of the agency does
extraordinary work with limited resources in the face of
significant growth of registrants, more involvement in our
markets from individual investors, and yes, increased
complexity. The SEC's headcount actually shrank from 2016
through last year. We shrank. With Congress' help, along with
this Committee, we have actually just gotten back to a touch
more than where we were 7 years ago.
America is blessed with the largest, most sophisticated,
and most innovative capital markets in the world. But we cannot
take this for granted. Yes, even a gold medalist must keep
training.
And that is why we are updating our rules for the
technology and business models of the 2020s. My written
testimony details those efforts, and I am sure we will get into
questions on this rule or that rule, climate and crypto, and
the like.
But I would like to just put it all in context. We are
updating our rules to promote efficiency, integrity, and
resiliency in the market. That is our goal. We do so with an
eye toward investors and issuers alike to ensure that the
markets work for them, rather than the investors working for
the market intermediaries.
We are working to help lower costs, increase access, and
promote financial stability. And each of the proposals we have
made in the last 2 years further that three-part mission as
laid out by Congress.
Our Division of Economic Risk Analysis provides robust
economic analysis, and it considers the costs and the benefits
as well as the effects on efficiency, competition, and capital
formation, and we greatly benefit from public input regarding
the economics, the policies themselves, and the SEC's legal
authority.
Now in the last 2 years, we have actually provided the
public ample time to comment, with an average of 70 days to
comment from the time we put a proposal and we publish it on
our website. Since January of '22, we have actually set in
place that is a minimum of 60 days--and sometimes as long as
100 days--from when it is posted on the website.
When comment periods close, though, we often continue to
get additional comments, through meetings and otherwise, which
staff consider as well, and based on the feedback, the staff
and the Commission consider possible adjustments to the
proposals. This process tends to take 12 to 24 months. And
during that period of time, as we move to possible adoption, we
only do so after we consider those comments, and we do so based
upon those comments and make adjustments. Of the finalized 22
rulemakings that we made, nearly all of them have changed based
on public feedback.
I am grateful to work alongside the remarkable staff and my
fellow commissioners to promote the efficiency, integrity, and
resiliency of the markets. And with that, I look forward to
taking this Committee's questions.
Chair Brown. Thank you, Mr. Chair.
Because there will be a huge turnout on both sides because
of the interest in your work and holding you accountable and
asking you questions, I am going to, more than usual, enforce
the 5-minute rule, starting questions with Senator Tester of
Montana.
Senator Tester. Yes, thank you, Senator Brown. I appreciate
your courtesy.
Chairman Gensler, thank you for being here. I appreciate
it.
You know, as many of the folks know, I am somebody that is
still involved in production agriculture. If the crop doesn't--
if I don't cut the crop, the crop doesn't get cut.
The question is this. I wish we were all in a situation
where we didn't need access to capital, but we need access to
capital. I wish we were in a situation where I didn't have to
sell grain to multinational corporations that I believe need
some regulation on them because I think they control the
marketplace far too much. But unfortunately, that is where we
are at.
Every once in a while in the mail--far too often, in my
opinion--I will get a survey as to how much grain I raise and
how much grain I have on hand and how many cattle I have and
chickens and pigs and horses. It is a real pain in the butt.
And the problem is, is you get to do this over and over and
over again. So, surveys aren't something that I am real crazy
about, OK, because I am busy trying to make a living.
We have had previous conversations about making sure that
the proposed climate rule does not lead to burdensome reporting
requirements. To add additional workload, pain in the neck--and
I am being generous when I say ``pain in the neck''--to
agriculture producers who do business with a publicly traded
company, which, by the way, is by far and away the vast, vast,
vast, vast majority of folks in production agriculture.
I appreciate you have been receptive of those concerns. We
have discussed previously in this hearing that it is not the
Commission's intent to have farmers and ranchers in Montana or
any other State or any other producers have to report on goods
that they sell to a publicly traded company. I want to make
sure that that still stands true.
Is that right?
Mr. Gensler. That does stand, right, sir. We oversee public
companies. That is it.
One, we are not a climate regulator. We are a securities
regulator. And right now, just to give you an example, of the
top 1,000 companies by market cap, about 80 percent of them
make climate risk disclosures. But that is--we are just trying
to bring some comparability to that, and we have heard from not
just you, but from many farmers and ranchers across this great
land, from a lot of small- and medium-size enterprises who have
said, look, we don't want to fill out the surveys, as you said.
And so I have asked staff to really take a close look at
those comments to make sure that we are only regulating the
public companies and not somehow indirectly those private
companies.
Senator Tester. You are fully aware that it is going to
take more than your intent for this to happen. Bleed down of
regulation is something that happens all the time. And I just
want to make sure that it is crystal clear that people in
production agriculture are not going to be faced with these
surveys.
Mr. Gensler. And I can't prejudge a final rule. It does
take five of us on the Commission to push out a final rule. But
staff has heard these comments. There are thousands of them,
and I have asked staff to come up with solutions.
Senator Tester. OK. OK, so walk us through--you answered my
next question with that answer. But walk us through, for the
companies required to report Scope 3 emissions, what do you
envision that reporting would look like?
Mr. Gensler. Well, again, because public companies
currently report some greenhouse gas emissions, which they
produce--so-called Scope 1--and, as you called it, Scope 3,
their supply chain. That is not as well developed currently,
and in our proposal, we said that no private entity--farmers,
ranchers, small businesses--needed to report that and that the
public company, if they are reporting it and they found it
material, they could estimate it.
But we have heard comments that that wasn't good enough,
from you and from others, and that is where we are looking
about how we can find appropriate path forward. Because, again,
about 80 percent of the top 1,000 companies are currently
reporting on climate risk. Over 50-plus percent are reporting
Scope 1 and 2, not Scope 3. And so we are looking through that.
Senator Tester. OK. And it is important to note that these
are publicly traded companies. A lot of family farms have
incorporated, but they are not publicly traded.
Mr. Gensler. That is correct, sir. And our jurisdiction is
just over those publicly traded--or public registrants, I will
call them.
Senator Tester. Correct. With respect to the chairman, I
hope somebody gets into crypto, but I would love to find out
what you are doing to protect consumers there.
I yield, Mr. Chairman.
Chair Brown. Senator Tester, I think several people will.
Senator Crapo of Idaho is recognized.
Senator Crapo. Thank you, Mr. Chairman, and I appreciate
Senator Scott allowing me to take this slot for my questions.
I do have a number of questions on the climate rule, the
open-end fund liquidity rule, the crypto rule, and so forth.
But I am going to focus my questions this morning on what you
described as the fact--one of your roles as being ``the cop on
the beat'' to protect investors.
I have heard from many Idahoans how they have been impacted
by the troubling trading halt of the Meta Materials, or MMTLP.
Investors across the country share these same concerns. They
have a lot of questions about what happened, the inability to
sell the stock, and potential IRS implications.
And to get answers about what happened, they had sent
letters and made Freedom of Information requests of the SEC
and, I believe, FINRA as well. And as of this point, I don't
think we have the full response. And you know that my office
has engaged to get answers as well.
Can you confirm that the SEC is reviewing the trading halt
from December 2022, and will you commit to publicly releasing
the SEC's findings on this investigation?
Mr. Gensler. Let me just sort of step back. FINRA is
separate from the SEC, and they have a set of rules that were
organized. And they--those rules are approved by the SEC after
public comment, but they then move forward and implement their
rules.
The matter that you raised around Meta Materials, if I
recall the name of it----
Senator Crapo. Yes.
Mr. Gensler. ----in December of 2022, if I recall, under
FINRA's rules, they sought a trading halt. They didn't seek the
SEC's advice or permission on that. That is something that they
did separately in that matter.
Senator Crapo. So is the SEC not investigating these
actions at all?
Mr. Gensler. The SEC's role is to investigate many things
in the capital markets. We don't speak to specific
investigations, but we do on a regular basis examine FINRA for
compliance with their rules and examine them on a regular basis
on whether they are following their own rules as put out to
public comment.
Senator Crapo. And are you examining their process and
their compliance with their own rules with regard to MMTLP?
Mr. Gensler. We regularly examine--because they are such an
important part of the capital markets, we examine them
annually, I think. Part of our Division of Examination has a
whole unit that examines FINRA on a regular basis.
Senator Crapo. Well, I don't know whether this question
relates to you or FINRA or both, but the investors have asked
for the aggregated, audited share count for the MMTLP and for
the blue sheet data to ascertain whether MMTLP shares were
subject to counterfeit and naked short selling. Have FINRA and
the SEC analyzed MMTLP for any potential fraud or wrongdoing?
Mr. Gensler. We seek to analyze fraud and wrongdoing
wherever it might be in our capital markets. And certainly, we
are well aware of these matters, but I can't speak about
specific possible investigations or even confirm or deny
whether we have them because it protects the markets when we
sometimes close an investigation and we don't find something.
But certainly, we could follow up with staff about the specific
questions about data.
Senator Crapo. All right. Am I hearing you say, though--I
do believe that I am hearing you say that there could be an
investigation underway, but you can't give data about it. But
if there is an investigation underway into these matters and if
that investigation finds answers, is that information not going
to be made available to the public?
Mr. Gensler. We only make information as a result of any
investigation public if we either settle or bring charges in
competent courts, and that really helps protect the public and
protects individuals when we don't bring charges.
Senator Crapo. Well, then how are investors and, frankly,
Congress to know whether you have even undertaken such an
investigation or whether such an investigation has resulted in
any outcome?
Mr. Gensler. Again, part of, I think, the trust in our
capital markets is being a cop on the beat, but also when we
close investigations that do not result in either litigation or
a settlement, that that is really between those various
registrants or market participants that it has been closed, and
they have a right to say if it has been closed or not.
Chair Brown. Thank you, Senator Crapo. You can follow up,
obviously, with written questions.
Senator Crapo. I see that my time has expired. I will be
following up with you on this issue, Chairman Gensler. I
appreciate it.
Mr. Gensler. I look forward to it, Senator, and just let us
know when you would like to.
Chair Brown. Thanks, Senator Crapo.
This week is the 15th anniversary, Mr. Chair, of the
collapse of Lehman Brothers. As we have discussed, the '08
financial crisis showed us all how everyday people can have
their lives turned upside down due to Wall Street greed. Now
Wall Street is pushing back on your attempts to make them tell
investors the real facts about their businesses.
What steps is SEC taking, are you taking to ensure that
investors and savers have the information they need to make
informed choices?
Mr. Gensler. Well, investors get the basic bargain they
have to have complete information, and so that is, if they are
public companies, to really have that full, fair, and truthful
information. And as that discussion we had with Senator Tester
about climate risk or what you mentioned, Senator, around cyber
risk, material information is part of what they need to make
their choices.
Also in crypto, that to the extent a crypto token is a
security, that investors get a chance to make their decisions
based on that full, fair, and truthful disclosure.
Chair Brown. You noted in your testimony the SEC recently
finalized the private funds rule that will require private
equity and hedge funds to increase transparency for their
investors. How will providing additional information on fees
and performance help protect workers' pension funds especially,
also charitable endowments, and for other investors?
Mr. Gensler. So this field has grown significantly over the
years, measured, as you said, well over $20 trillion of assets.
Well, standing on one side are the investors, and those
investors often are pension funds, and the workers and the
teachers and firefighters in your districts and your States
benefit.
And so it is really we have proposed and we have finalized,
based on public comment, rules to bring greater transparency
about the fees, the performance, and what is called ``side
letters'' that these private fund advisers have in this
marketplace. And that helps promote competition.
I mean, that helps promote really the efficiency of the
market. And if the costs come down, that means the returns for
retirees goes up.
Chair Brown. Thank you.
As promised to Senator Tester, there will be at least one
question, series of questions about digital assets and crypto.
Frauds and scams in the crypto markets cost consumers millions.
Decades ago, the same kinds of problems were all over Wall
Street. Unscrupulous promoters pushed investments in
speculative or even bogus companies in some cases. Investors
cashed out, putting their interests ahead of their clients'
interests.
We cleaned up our markets through investor protections like
strong disclosures, conflict of interest rules, always a work
in progress. Thank you for that. The U.S. markets, as we know,
lead the world in transparency and integrity.
Question, Chair Gensler. If crypto markets lived up to the
investor protection principles we have in other markets, would
that help protect Americans from the crypto abuses that cost
consumers billions?
Mr. Gensler. If they were to live up to the investor
protection built into their current laws, it would help
investors. But right now, unfortunately, there is significant
noncompliance, and it is a field which is rife with fraud,
abuse, and misconduct.
Chair Brown. Thank you.
Senator Warner and I have introduced our bill to create
conference of standards and workforce disclosure because we
know the investment in worker development and training is
critical to so many industries. I will be entering a question
for the record on that important issue, and I think that
Senator Warner will be asking about that later.
Last question. A majority of the largest companies already
disclose information about climate and greenhouse gas emissions
on a voluntary basis. They do so because investors demand that
information. But without a clear standard, that information is
not easily digestible and is not comparable across companies.
What is the SEC's role in making--what is your role in
making these disclosures--which, as I said, investors are
clamoring for--making these disclosures useful and able to be
compared and analyzed?
Mr. Gensler. It is a role that Congress gave us over the
decades to help investors be able to compare information that
companies are putting out, and it is about material
information. And investors, as you rightly said, are making
decisions today based on the climate risk disclosures,
including greenhouse gas disclosures of the major companies in
America.
That is already happening. And so our role is just to bring
some comparability and consistency to this, and that is why we
put out a proposal. We got over 16,000 comments. Like other
rules, we are likely to make adjustments. Like the discussion I
had with Senator Tester, particularly we got a lot of comments
around what is called Scope 3 disclosures, and that is what we
are trying to move forward on.
Chair Brown. Thank you. Senator Scott.
Senator Scott. Thank you, Chair.
You and I had a discussion about the importance of being
responsive especially to the minority, and I want to have that
conversation with you. But before we get there, I do want to
ask a couple questions that I think are relevant.
Chairman, in April, Chairman McHenry and I sent you a
letter regarding your proposal impacting mutual funds and
retirement savings. We expressed our concerns with the inherent
unfairness of creating a two-tiered market that would
significantly impact retirement savers at a time when so many
are struggling with rampant inflation, not to mention that your
liquidity risk recharacterization of mutual funds would
significantly alter investment strategies for everyday retail
investors.
It is saying something when a proposal like yours brings a
large and diverse group of stakeholders out against it. Given
the current SEC's tendency toward rushing to finalize rules, my
fear is that you will finalize this proposal without properly
addressing my concerns and the concerns of so many in the
industry, as well as those of the retirees and the customers.
Or worse, finalize this rule or proposal with an entirely
new structure, like we have seen in the money market fund
reforms rule. Are you willing to rescind this proposal so as to
not create a two-tiered system and unfair advantage for a large
swath of investors?
Mr. Gensler. As we move forward with this, considering
this, we got a lot of comments, as you said, about this
proposal. It is about open-end funds, mutual funds as most
people would call it.
Senator Scott. Yes.
Mr. Gensler. And to ensure for their--at times of stress
that their pricing matches up, when somebody redeems from a
mutual fund, that the remaining shareholders in that mutual
fund aren't bearing what is called dilution.
We got a lot of comments, including your letter with Chair
McHenry, which we appreciate, and we will make considered
choices based on the economics and, as you said, based upon
ensuring that investors' interests come first.
Senator Scott. I think it is incredibly important, and I
bring that up because, as a guy who used to sell mutual funds,
I see the challenges that will be presented to customers who
are purchasing those mutual funds in, frankly, the two-tiered
system that I am talking about.
But relatedly, despite your reassurances that the public,
especially the millions of everyday investors most directly
impacted by these proposals, would have sufficient opportunity
to provide feedback through the notice and comment process,
your agency provided just over 90 days to sift through nearly
1,700 pages of 4 proposed rules wrapped into one proposal. This
same proposal included roughly 1,200 questions from your staff
for industry feedback.
If you have over 1,000 questions, I fail to see how you can
say with a straight face that you have issued a proposed rule
and not a request for information. Do you think 90 days is a
reasonable amount of time for the average investor or small
business to digest a complex proposal that includes four
rulemakings, including by answering roughly 1,200 questions
again in just 90 days?
Mr. Gensler. I feel very proud of the agency and the work
to comply with the Administrative Procedures Act to seek that
public comment in the equity market proposals. As you
mentioned, we voted them in December of last year. We kept the
public comment file open until March, the end of March. So 100
and plus days from when we put it on our website. And we
continue to get meetings and comments, and the staff takes
those into consideration as well.
Senator Scott. I will just say that 1,200 questions for
small businesses, investors to answer in a 90-day window seems
a bit of a high bar. But the Dodd-Frank Act required about 400
rules for financial regulators, and 67 of those would come from
the SEC. Today, it seems like we are living in the twilight
zone, asking people to comply to unrealistic timeframes with
too many questions and, frankly, as you can tell, too many
rules, from our perspective.
According to the Committee on Capital Markets, under your
leadership, the SEC has put forward 47 proposals, about 22 of
them in the first several months of your leadership. What is
even more troubling is these rules stand to completely change
our capital market structure, which benefits the average
investor more today than at any other point in history.
The breakneck pace you are pumping out regulations should
not be applauded. The regulations the SEC has proposed under
your leadership are unjustified and are sowing discord and
confusion for industry and market participants alike.
How do you square your mission, which includes maintaining
fair, orderly, and efficient markets, with the upheaval of
market functioning you aim to create? And I only have 10
seconds for your answer because he is getting ready to cut me
off.
Mr. Gensler. I thank you. I would note we take our three-
part mission very seriously. Bloomberg Law recently wrote an
article that said we are actually behind three predecessors--
Chair Clayton, Chair Shapiro, and Chair Pitt--those 22 final
rules, that we are fourth out of all three of my predecessors
did more final rules in their first 2 years and 4 months.
We take this very seriously. We are not working against a
clock. It tends to take 12 to 24 months, if we were to finalize
a rule. We reopened 18 of the rules. There will be changes in
most of these rules, based on public comment and economic
feedback.
Senator Scott. Thank you. I know that went over time.
Chair Brown. Thank you.
Senator Scott. Thank you for your patience, Chairman.
Chair Brown. Senator Menendez? Senator Menendez of New
Jersey is recognized.
Senator Menendez. Thank you.
The use of artificial intelligence is becoming increasingly
prominent in a number of industries, including the financial
sector. The tools can provide enormous benefits to investors,
but they also come with a variety of potential risks. Can you
describe how the financial sector is deploying AI, and what are
some of the potential risks you can see as AI tools become more
widely used in the capital markets?
Mr. Gensler. Predictive data analytics and artificial
intelligence already have been used and used extensively in
finance, even before the recent ChatGPT. It is used in robo-
advising and in brokerage apps, but it is also used by more
sophisticated investors who may be listening to this testimony
right here and having computers analyze it and making market
decisions. That is called sentiment analysis.
But they also drive efficiency in the capital markets, good
efficiency in the capital markets on account opening
documentation and compliance, and insurance companies are using
it to also do claims processing, to comply with anti-money
laundering.
I think there are some risks, though. There are some risks
in our capital markets, some which could lead to conflicts in
the market, and we have put out a proposal to address those
conflicts. Some that are harder to grapple with. There may well
be that the financial crisis in a number of years or in 10
years is because we find everybody in the mortgage market may
be relying on one model, and we all go, my gosh, I didn't
realize there was one AI model.
Senator Menendez. I want to point to something you
previously commented on, which--and I will quote it. ``The
challenges of explainability may mask underlying systemic
racism and bias in AI predictive models.''
Minorities already face disproportionate trouble in
accessing capital, and poorly built AI tools have the potential
to entrench or expand those gaps. So it seems to me that while
we can think about what AI can do in the positive sense within
the capital markets, the SEC should be focusing on mitigating
what are the potentially negative risks. Is that something that
you are focused on?
Mr. Gensler. We are. We put out a rule for comment and
proposal around conflicts in the market, when a robo- adviser
or brokerage app is taking into consideration their interest
and may be putting that ahead of their investors.
You also ask an important question about there is often
biases in the data themselves. The data being collected often
reflects the biases in our great land, and unfortunately, then
investment decisions, investment advice might be based on those
biases. And outside of our jurisdiction, of course, and other
agencies' jurisdiction, credit allocation could be based on
those hard to explain data and biases.
So I share your concern, but at the SEC, we are absolutely
focused on some of those issues around investment advisers--
robo-advisers, so to speak--and brokers.
Senator Menendez. OK. Two years ago, the SEC's Asset
Management Advisory Committee unanimously submitted four
recommendations for actions the SEC could take to improve
diversity in the asset management industry. You and I have
spoken about this several occasions.
And the last time you were here, the SEC had adopted two of
the recommendations. You said the other two were still being
considered. Can you tell me what progress has been made on
adopting the other two recommendations, particularly the
requirement for enhanced disclosures by investment companies
and advisers regarding diversity within their workforces and
leadership?
Mr. Gensler. Well, thank you, sir.
With regard to that recommendation, one thing we did do--
and it was about the time of this Committee hearing last year--
was that the staff put out an answer to a question we
frequently get, is whether somebody can take into consideration
an asset manager's workforce diversity and still be in
compliance with their fiduciary duty. And we answered that in
the affirmative, consistent with the rest of their requirements
and their law.
And though that didn't--the full recommendation went
further, the full recommendation of the Investment Advisers
Committee went further, we thought that this was really an
appropriate thing to answer that important question.
Senator Menendez. I hope you will look at casting votes on
some of these recommendations that they unanimously did.
Finally, just to follow on on the question on the open-
ended funds, this is the most significant change to mutual
funds in generations. The question for me is what is the
economic analysis that the Commission conducted and how it
showed that these changes are necessary?
Because when I look at the Consumer Federation of Americans
saying the negative impacts this rule could have, retirement
savers in particular would be adversely affected by the
proposal, it comes to mind as, OK, what was the analysis that
brought you to where you are?
Mr. Gensler. The analysis--thank you. The analysis was
based upon some real events.
In the spring of 2020, as COVID was breaking out and the
pandemic was breaking out, many funds in that stressed time
were getting redemptions. People were pulling out of the funds,
and some of those funds were then calling up the Federal
Reserve and the SEC saying, ``We need support here,'' because
there were such rapid redemptions and a fear of those rapid
redemptions.
And so it is trying to address some of those things, and
the law says that we should look at things to make sure that a
fund's price when somebody redeems doesn't dilute the remaining
shareholders. So it is looking at that and looking at that very
closely.
But again, we have heard comments. We tend to make
adjustments along the way based upon those comments. We are
taking those comments seriously from you, Senator, from other
Senators who have raised this and, of course, CFA and others.
Senator Menendez. Mr. Chairman, my time is up. I just want
to say----
Chair Brown. Thanks, Senator Menendez. Time has expired. I
am trying to give people 5 minutes today.
Senator Menendez. I just want to say that we are going to
look--I am going to follow up with questions for the record.
Chair Brown. Thank you, Senator Menendez.
Senator Rounds.
Senator Rounds. Thank you, Mr. Chairman.
Chairman Gensler, it has been a while since we have had an
opportunity to visit with you. I don't send a lot of letters to
you, and when I do, I try to make them as precise and clear as
possible.
We did send a letter on May 10 of this year, along with a
number of other Members, and in it, we asked for three specific
items. We received a response back on one with a chart
detailing rules that were being promulgated, but no response to
our other two requests. Like I said, I don't ask for a lot of
different items, but I really do expect that when we do ask a
letter that we get an appropriate response back.
Ranking Member Scott had basically said that he didn't feel
that you were being responsive, and my question to you is, is
there a policy that you have with regard to requests for
information from the minority on the Committee versus the
majority on the Committee?
Mr. Gensler. One, I would like to look and meet with you
and see what the questions were. I am glad to follow up and
meet with you in person or over the phone, if you wish.
But we are responsive to individual Members to their
questions, often policy and other questions that we respond to.
We do--if there is an oversight request, that comes, as I
understand it from the Rules of the Senate and Rules of the
House, generally from the Committee and the majority. But in
terms of the day-to-day questions, we like to engage with you
as you wish.
Senator Rounds. As I say, I don't ask for a lot. But when I
do, I really do expect that we will get a response back pretty
clear on our requests. We didn't to the May 10 letter, and I
will follow up with you, sir, because I think it is important
in this particular case.
We were concerned about the pretty aggressive rulemaking
attempts that you have right now. In fact, you have 48 new ones
and I think a total of 60 that you were working through, and I
just--let me just play with one of them for just a minute.
Technology clearly has played a role, a central role to
expanding the market access for institutional and retail
investors. You have said yourself that we can use technology to
make finance more inclusive and more accessible. However, you
have not brought that attitude to the Commission, as is evident
by the SEC's new predictive data analytics proposal.
Although in name the proposal is targeted at emerging
technology like AI and machine learning, the proposal creates a
restrictive regulatory regime that will govern any analytics
tool and is inconsistent with decades of legal and Commission
precedent regarding the handling of conflict of interest,
including the Commission's own fiduciary interpretation and
regulatory best interests from as recently as 2019.
I echo the comments of Commissioner Pierce that the new
predictive data analytics proposal reveals the Commission's
rather hostile attitude toward technology, or at least appears
in ignorance toward it. Mr. Chairman, was this rule intended to
encompass essentially all computational tools, not just AI and
machine learning?
Mr. Gensler. It is actually technology neutral, and this is
an important concept. It is like if an investment adviser--
think about a robo-adviser--is telling you their advice, and it
is only based on your family and your well-being and so forth,
great. Thumbs up.
But if they are also taking into account their own
interests--their profits, their revenues, and the like--therein
lies a potential conflict. And whether they are using machine
learning or they are using some other data analytics,
predictive data analytics, there may be a conflict there, and
then this proposal was to get public feedback on how to, in
essence, neutralize those conflicts and address those
conflicts.
Senator Rounds. Have you received a lot of responses back?
Mr. Gensler. We are--I think the comment period might close
October 10. So it is an open comment period right now. But I
would anticipate we would get a lot of comment, particularly
after the so-called ``gamification,'' the focus in early '21 on
brokers using prompts to----
Senator Rounds. I am hoping that you take a look at that
and that we hear more about it before you make a final
determination.
And also, Mr. Gensler, Chairman Gensler, earlier this year,
the Commission proposed the safeguarding advisory client assets
rule, which as drafted would ultimately transform the way in
which a bank holds client cash. Requiring cash to be segregated
marks a fundamental shift from current banking practices and
for the first time would broadly require banks to segregate
client cash deposits.
My concern is that the SEC is inserting itself into matters
at the core of the banking system--deposits, credit, payments--
and specifically within the jurisdiction of prudential
regulators. My question is does the SEC have the authority to
regulate custodial banks?
Mr. Gensler. We put out a proposal that is actually based
upon new authority that Congress gave us in 2010 about the
assets held--investment advisers and their custodial assets,
and so that is why we were updating this. And for decades, we
have had prior authorities as well, which is a yes to your
question, around qualified custodians can be banks. They can be
broker dealers. They can be something called futures commission
merchants. They can be at the Federal level. They can also be
at the State level.
But then we have a role to say what is required of those
custodial arrangements so that the investment adviser is not
losing, using, or misusing a client's assets.
Senator Rounds. Mr. Chairman, my time has expired, but I
will follow up with some additional questions for the record
specifically on this particular issue.
Chair Brown. Thank you, Senator Rounds.
Mr. Gensler. I look forward to it, and I am glad to meet in
person as well.
Chair Brown. Senator Cortez Masto is recognized, from
Nevada.
Senator Cortez Masto. Thank you, Mr. Chairman.
Chair Gensler, it is great to see you again. Thank you.
Mr. Gensler. Good to see you again.
Senator Cortez Masto. I am going to follow up on the
conversation you were having with Senator Menendez on
artificial intelligence, and let me ask you this. Beyond
disclosing conflict of interest, which you talked about the new
rule that you are looking at, should trading houses and money
managers be required to disclose their use of AI in other
areas?
Mr. Gensler. It is a very good question. It is an emerging
technology. And while we don't generally say that a broker or
an investment adviser needs to disclose whether they are using
an Excel spreadsheet or whether they are using machine
learning, I think that there is new challenges with artificial
intelligence--the lack of explainability, the chance for bias
and biases in how it is used, the conflicts, as we were talking
about.
And so it might be something Congress would want to take
up, such disclosures. But it tends to be that at the SEC, we
are technology neutral.
Senator Cortez Masto. So can I ask, and you touched on
this, is there currently the ability to audit an investment AI
algorithm for biases to ensure that clients and retail
customers are receiving advice in their best interest?
Mr. Gensler. It is a very good question that computer
scientists as well as policymakers need to grapple with. But
the nature of artificial intelligence is that it sometimes has
so many factors, millions or not even billions of variables
that it is looking at, it is very hard to explain. And humans
are very intelligent, but these models are hard to explain, and
thus, there can be biases that are hard to explain.
And so it is something that I think is a worthy policy area
for further consideration.
Senator Cortez Masto. And then, finally on the regulatory
side, let me say how do you envision the SEC using AI for
market surveillance, for analysis, and in enforcement
activities?
Mr. Gensler. So we already do in some market surveillance
and enforcement actions, to look for patterns in the market.
And I know that some of the self-regulatory organizations do as
well. It is one of the reasons why we have asked Congress for
greater funding this year in 2024 to help buildup our
technology budget for the emerging technologies.
Senator Cortez Masto. Thank you. And last time we talked--I
am going to jump to cryptocurrencies, the enforcement that you
are undertaking with respect to crypto--there was a challenge
at the time because you were understaffed. Do you feel
comfortable now that you have the staff that you need,
particularly on the enforcement side, when it comes to the
fraud that, unfortunately, we are seeing related to some
crypto?
Mr. Gensler. I would widen it out. The agency is only 3
percent larger than we were 7 years ago. So I would say, no, we
are not large enough as an agency, given that just I mean the
markets have grown 50 to 70 percent in terms of activity,
complexity, et cetera, during that time.
In terms of crypto more narrowly, I have been around
finance for 44 years now, I guess, and I have never seen a
field that is so rife with misconduct. It is just--it is
daunting.
Senator Cortez Masto. Thank you. And then let me jump to
clawbacks of executive compensation.
We have seen that when a company fails, thousands of
people, we know, can lose their jobs, and investors lose their
money. Yet too often, unfortunately, we see the CEO and
executives walk away with millions in stock options and salary.
So can you expand on the SEC's recently completed rules on
executive compensation, and how is the SEC improving rules that
limit insiders' ability to trade and sell stocks?
Mr. Gensler. So we have done a number of things. Two were
mandated by Congress. One was called clawbacks that Congress
mandated that if there was erroneously produced financials and
an executive got paid based on that, they have got to give that
money back to the company when the financials are revised.
Two was something called pay for performance. Again,
Congress mandated it, and 12 years later, it hadn't been done.
We got that done.
The third thing as well was something called--it was about
how executives sold their stock to the public and that they get
in compensation. We basically at its core said that you had to
wait at least until the next quarter's financial results were
published. You had to have at least a 90-day cooling off
period.
To file the plan, it has got be kind of on automatic pilot,
and then at least 90 days had to go by before you could sell.
And that only went into effect about 6 months ago.
Senator Cortez Masto. Thank you. Thank you, Mr. Chairman.
Chair Brown. Thank you, Senator Cortez Masto.
As I mentioned at the outset of the hearing, we are more
strictly enforcing than I normally do the 5-minute rule because
there are it looks like 20 Members showing up.
So Senator Tillis is recognized from his office.
[Pause.]
Senator Tillis. Mr. Chair, can you hear me?
Chair Brown. Yes, we can. Senator Tillis is recognized.
Senator Tillis. My assistant said you didn't hear me. I
thought you would have interrupted me, but I will be brief.
I guess in response to the letter, we got a one-and-a-half
page response that, in my judgment, was not responsive to the
questions. I want to ask you a few here now.
One, does the SEC's analysis on each of the four rules
contemplate the interlocking nature of the rules?
Mr. Gensler. Senator Tillis, just because you may not have
been on audio at the beginning, which rules? Just so I can
understand.
Senator Tillis. We are talking about regulation best
execution, order completion rule, minimum pricing increments,
and disclosure of order execution information.
Mr. Gensler. Thank you.
Each of the proposals have robust economic analysis that
speak to each of those individual matters. One, which was
disclosure, as you mentioned; one, which is the agency itself
adopting a best execution rule; one updating the market
structure rules.
Senator Tillis. I understand each of those rules----
Mr. Gensler. And so each of those individually address the
economics of each of them.
Senator Tillis. Individually. But are you saying there is
no valid--there is no reason to actually understand the
interlocking nature of them? I mean, if you are analyzing down
a stovepipe, but are you really doing the kind of analysis to
understand how they are going to work in tandem as they get
promulgated?
Mr. Gensler. So there is two other things that we do. It is
very good question. One is we do ask questions about that, and
we received a lot of comments. But second, if we were to
finalize any one of those four rules--and we do this on other
rules as well--we then incorporate that in what is called the
economic baseline.
Every one of our economic analyses as one of its tenets has
a baseline. So if we were to finalize one of these rules prior
to others, then we incorporate that in the economic analysis.
Senator Tillis. OK. I am going to submit a couple of
questions for the record. But I just wanted to say that the
response was a bit disappointing. It more or less referred us
back to the SEC website.
But I want to touch on something that Senator Rounds asked
about, and it is the safeguarding advisory client assets
rulemaking. Given the impact that it has on core banking
activities, at what point in drafting did the SEC actually
consult or confer with prudential regulators?
Mr. Gensler. I know that our staff has ongoing discussions.
This was a new authority that we got in 2010, and the team that
worked on it actually had been working on it for 12 years. So
there has been ongoing discussions off and on with bank
regulators over those dozen years.
But in terms of the specific rulemaking, certainly since it
has been out, there has been discussions. But I couldn't tell
you how many times over the 11 or 12 years before the staff had
been working on it.
Senator Tillis. Mr. Chair, I am going to submit for the
record letters from industry on a couple of subjects. But on
this particular subject, it appears to me that there hasn't
really been an extensive vetting and discussion with the
prudential regulators, and we will get back--we will submit
that for the record.
But Chair Gensler, unless I can be convinced that there was
significant engagement, why wouldn't we just put this rule on
hold until we got a more fulsome response, better basis for
execution?
Mr. Gensler. Because, Senator, what we do is we put things
out to proposal. We get public feedback. Sometimes we
repropose. We have done that a number of times--or reopen. And
often, we just--we change, we adjust, based on the public
feedback. And we have done that on nearly every one of the
proposals that we have adopted, these 22 adoptions.
Senator Tillis. Just real quick, number one, I am curious
about the analysis that you have done to determine how the rule
would impact market liquidity. I would like to get that. I
would like to ask that for the record. I don't think you could
possibly answer that in 45 seconds. So I am going to honor my
time limit.
I am also kind of curious as to whether or not you have
completed an analysis--if you have, I would like to see it--on
the costs borne by the investor on the requirements for the
proposal. Just a quick answer, within 30 seconds. Have you done
much in the way of work, and can we look forward to a detail
analysis on the liquidity question and the impact on investors?
Mr. Gensler. We do, on each of our rules, look at the
economics. And depending upon the rule, some are very germane
to liquidity, and some are less germane to that. But we do
that, and that detail analysis is put out to public comment
and, as you said, is on our public website.
Senator Tillis. Could we get that information for the
record?
Mr. Gensler. Yes. But again, it might be that which is
already on the public record. I want to be candid with you
because that is--that is the analysis that we have done.
Senator Tillis. Thank you, Mr. Chair.
Chair Brown. Thanks, Senator Tillis.
Senator Warner of Virginia is recognized.
Senator Warner. Thank you, Mr. Chairman.
Good to see you, Mr. Chairman. I was going to greet you a
lot, but I got a 5-minute timeline. The chairman specifically
gave me that notice on 5 minutes.
I got two topics. Let me get into them right away.
First is the whole question around human capital
disclosure. We all know, we have talked about this many times,
7 years ago, 70, 80 percent of corporate value was in plant and
equipment. We are now at over 90 percent in terms of intangible
assets, intellectual property and human capital.
I think investors want to have that kind of information
about what companies are doing in terms of investment in their
workforce, their biggest asset. Last year, Chairman Brown and I
sent you a couple letters. Just yesterday, we reintroduced the
Workforce Investment Disclosure Act. And before my colleagues
say, oh, my gosh, is this some rearing again of ESG or anything
else? No, this is something that Chair Clayton under President
Trump was--took the lead on.
Given the fact that there is this consensus that companies
and investors want to know how they are doing in terms of
investing in human beings, recruiting and retaining, last
September you would like to see, you testified, that this was
one of the items that were on your agenda. Where are we, and
when can we see more action?
Mr. Gensler. Again, you mentioned Chair Clayton. We wanted
to see the data and see what happened off of that rule from
2020 for the first 2 years and build upon that. And really be
targeted, targeted around turnover and workforce issues. And
there is some consensus around that. And just trying to find
that and stay, as I would say, targeted to really important
issues around the workforce and the cost of the workforce, the
turnover of the workforce, the retention, the training, as you
mentioned.
Senator Warner. Well, we would like to see action. I know
you have got a big agenda. On this one, I would urge you to
move expeditiously. And again, I say, particularly to my
Republican colleagues, I don't think we can find a CEO anywhere
in America that doesn't say their workforce is their number one
asset, and the fact that we have such little reporting on that,
I think, it is an area where we need improvement.
I want to move quickly to AI. I concur with Senator Cortez
Masto on some of the questions she raised and Senator Menendez.
I am chair of the Intelligence Committee, and I see upside, but
I see huge, huge, downside.
You are an AI expert from your work at MIT, from your July
17 speech. As we think about how we get our arms around this, I
actually think the two enterprises in our society that are most
subject to interference from AI in terms of undermining public
trust is faith in our elections. And there is a lot of talk
about how AI could manipulate as we go into a Presidential
election.
But the other entity that is totally reliant on public
trust is public markets. And I am concerned we have seen a
little bit of activity here, where there was the fake fire on
the Pentagon, and that interfered with the market. I am
candidly surprised that we have not seen a lot more
interference in Fortune 200 to 500 companies not only in terms
of deep fakes, but AI tools that might generate false
complaints about products or, frankly, false filings in terms
of regulatory entities.
How--in the minute and 30 seconds you have got left, how
are you thinking about making sure that our public markets and
the trust in those markets are not undermined by the rise of AI
across the board?
Mr. Gensler. You are absolutely right. I mean, fraud is
fraud. And if you are using AI and you are doing deep fakes in
the market, that is a real risk to the markets.
And I think that we have good laws, but these new
technologies will challenge those laws, and we look forward, if
you are thinking about legislation, to work with you on that.
But I do think that deception is deception, and I wouldn't let
anybody tell you that there is no human behind the algorithm.
There is still some human behind the algorithm that is setting
the broad hyperparameters. These are the top-level what is the
algorithm training on.
I would note that there was a deep fake on little, old me,
that I had resigned, that was put out in the middle of the
summer. And I guess somebody was trying to influence stock
market prices or crypto prices one way or the other, and my
comms shop had to quickly say no, and that was the end of that.
Senator Warner. Well, the fact that you are a highly public
figure, but those Fortune 200 to 500 companies. And I hope--I
am surprised there has not been more. I agree deception is
deception. But I hope, as we think about this, that we not only
go after the generator of the algorithm, but we also realize
that the distribution model, particularly if it is coming out
of a large language model, we cannot repeat the mistakes we
made in social media with the 230 get out of jail free card.
Thank you.
Chair Brown. Thank you. Senator Hagerty of Tennessee is
recognized.
Senator Hagerty. Thank you, Mr. Chairman.
Welcome, Chair Gensler. In your prepared testimony, you
referenced novel authorities that were granted to the SEC by
Dodd-Frank, as you claim, and I would like to start my comments
by briefly addressing some of those before I get into the
questions.
In several of the recent proposed rules that have been put
forth by the SEC, notably the private fund advisers and the
predictive data analytics rules, your claimed authority is
based on what I view is a very tortured interpretation of
Section 913 of Dodd-Frank.
As you know, the Supreme Court has recently said that major
regulations require clear congressional authorization. Yet
Section 913(g), the provision that you rely most heavily upon,
provides very limited authority to regulate in this space, not
blanket authority for the SEC to ignore all the other binding
language of the law and completely rewrite the standard of care
for broker dealers and for investment advisers.
If Congress really want to grant unlimited authority to the
SEC, do you think it would have put such an expansive power in
a subsection titled ``Other Matters'' and buried it in a
provision that discussed standards for providing personalized
investment advice to retail investors? That is clearly not the
case.
Basically, any law can be distorted by reading a single
section in isolation. For example, in the predictive data
analytics rule, the SEC defines a conflict of interest as any
interest of the firm. In addition to adhering to an overly
literal reading of the law, you also conveniently ignore its
clear limitations, which are obviously intended to confine the
SEC's authority to ``certain sales practices and conflicts.''
What appears to be happening is that you are targeting a
subset of the industry that is despised by the left. By
applying a different standard for emerging tech, the SEC is not
acting as a neutral party. Indeed, the SEC seems to be
targeting many of the newer entrants that are actually
expanding Americans' access to investments.
In the case of the private funds rule, the SEC already has
ample enforcement authority to recover funds on behalf of
investors. So there must be another purpose for this rule. What
you appear to be doing here is trying to change the negotiated
dynamics between two sophisticated parties in favor of one over
the other, a clear abuse of power.
One of these problems with such an ideologically driven
agenda is that important matters that are critical to the SEC's
missions fall through the cracks as you waste resources on
matters like this. So let us get to a matter where the SEC
really should be focused upon, and that is Chinese Government-
connected broker dealers.
Recent congressional oversight letters and press reports
have highlighted the growing trend of broker dealers with
connections to the Chinese Government. These Chinese-linked
firms are operating retail businesses in the U.S., including
Webull, Moomoo, Prometheum, and Tiger securities. Some of these
companies, like Webull, even have registered representatives
located in China. As you know, Chinese law is far different
from U.S. law. They don't play by the same set of rules.
So my question is how can the SEC and FINRA actually
oversee registered representatives and employees of these firms
who are located in China, and why should these firms be allowed
to register and do business with retail customers in the United
States?
Mr. Gensler. You raise a good question, and regardless of a
broker's location--whether in China, whether in Europe,
anywhere--they want to be in our markets, they have got to
participate and play by our rules, absolutely. And they have to
be subject to them and subject to examination and have openness
to that. And----
Senator Hagerty. Well, how do you examine and impose the
rules on these guys located in China?
Mr. Gensler. Having gone through a lot of challenging
negotiations with the Chinese authorities over a separate
matter around auditing and inspecting auditors, I share your
concern because it is quite a challenge. But we successfully--
with Congress' help on something called the Holding Foreign
Companies Accountable Act--we got the leverage. Congress gave
us additional leverage, and we were able to be successful
there.
And we have actually been able to, though the PCAOB, the
auditing board, to inspect, inspect those auditors.
Senator Hagerty. Well, I would encourage this allocation of
resources to really focus on these sort of actors.
I would like to turn to another point. Last month, U.S.
Court of Appeals for the District of Columbia unanimously ruled
that the SEC's denial of Grayscale's spot bitcoin ETF was
``arbitrary and capricious.'' They argued that the product is
mathematically indistinguishable from already-approved futures
products currently trading on U.S. exchanges.
So my question is can you explain what the SEC needs to see
in a filing to approve a spot bitcoin ETF, and what questions
do you still need answered from issuers about the market and/or
market infrastructure in order to allow this to happen? I would
just like to get some clarity here.
Chair Brown. Be very brief, and we are moving on, Chair
Gensler.
Mr. Gensler. Senator, I thank you for the question.
We are still reviewing that decision and reviewing--we have
multiple filings around bitcoin exchange traded products. So it
is not just that one you mentioned, but it is multiple others.
We are reviewing them, and I am looking forward to staff's
recommendation.
So, and similar questions.
Chair Brown. Thank you, Mr. Chair.
Senator Warren of Massachusetts.
Senator Warren. Thank you, Mr. Chairman.
So the job of the SEC is to protect investors, not the
fossil fuel industry. And when you were nominated 2\1/2\ years
ago, you said that giant corporations should not be able to
hide their climate risks from investors. Without a strong
climate risk disclosure rule, that is exactly what companies
will continue to do.
You have a mandate to protect investors. You have strong
public support to do this, and I just want to say it is time
for you to get this job done. But instead of spending the rest
of my time fencing with you over when you are going to get this
rule out on climate and a strong rule on climate, I want to
shift gears and talk about private equity.
When private equity funds acquire a company, they and the
companies they buy don't have to follow many of the rules that
apply to publicly traded companies and brokers that are selling
registered securities. So last month, the SEC finalized new
rules that banned some, but not all, of private equity's most
abusive tactics.
Even so, after the rule change, private equity funds can
still use registration exemptions intended for small businesses
to raise trillions of dollars in private market without filing
public disclosures. That is a great deal for private equity,
not such a good deal for investors. Again, SEC's job is to
protect investors, but more and more people are at risk because
they are sucked into markets that have weaker rules.
Chair Gensler, do you have a ballpark estimate of how much
money investors poured into the private equity markets--private
markets, including private equity markets, where they are
covered only by the weaker SEC disclosure rules?
Mr. Gensler. The private funds' total assets under
management are about $26.5 trillion.
Senator Warren. But how much was poured in last year? Do
you know the number? I just--I want to look at what is
happening now.
Mr. Gensler. I am sorry. It is in the low single-digit
trillions.
Senator Warren. Does $4.5 trillion sound right to you?
Mr. Gensler. We could get back, but it is probably in the
ballpark.
Senator Warren. It is right? OK. It is right. So do you
know how much money investors put in in the same time period
into the public market, where they got much better protection?
Mr. Gensler. What you are highlighting is there is as much
activity and in some years more activity in the private
market----
Senator Warren. Do you know what the number was last year?
Mr. Gensler. ----than the public market?
Senator Warren. Do you know what the number was last year?
Mr. Gensler. I suspect you are going to tell me.
Senator Warren. I am. It was $1 trillion. In other words,
the SEC is carefully regulating a public market that handles
only about 1 in 4 new investments dollars, while almost 3 out
of 4 dollars are going into a private market that has much
weaker rules. And those weaknesses are meaningful, even after
the rules change.
So, for example, private equity firms selling exempt
securities don't have to report audited financial data to the
public. Also they don't have to disclose data showing that a
company has lost all of its contracts or is getting sued for
billions of dollars. Seems to me like that is an invitation for
fraud.
The SEC was built so that investors could have confidence
in the honesty of markets, and now three-fourths of investments
that are coming in are not getting those basic protections.
So, Chair Gensler, how do you explain to the American
people that the SEC, whose job it is to make sure that markets
are honest, is standing by while private equity and the
companies they own scoop up investor money without any public
verification that the books are honest or that they aren't
hiding huge risks? Isn't it your job to fix that?
Mr. Gensler. Well, part of what we did in a finalized rule
just a few weeks ago was require quarterly reporting on their
fees, performance, and side letters, and then at least annual
audits of those documents.
Senator Warren. So let me just say here, Chair Gensler,
since we are really pressed on time, I am not disputing that
you have done good things. I hope I said that right at the
beginning. You have.
But these look like two giant holes to me, and the question
I am asking is how do you explain to investors who now
represent three-quarters of all the new investment money that
you are not even making these guys do an audited financial
statement?
Mr. Gensler. Well, actually, the rule that we just finished
has an annual audit in it. So it is of these private funds, not
of the underlying companies, but of the private funds
themselves.
Senator Warren. Well, let me just say--we are out of time--
I really think that given the risks in this market, I
appreciate what you have done. There is more still to do, and I
hope we can do it as quickly as possible.
Mr. Gensler. Thank you.
Chair Brown. Thanks, Senator Warren.
Senator Vance from Ohio is recognized.
Senator Vance. Thank you, Mr. Chairman. Thanks to you and
the Ranking Member for having this hearing.
And thanks to Chairman Gensler for being here.
I want to just ask a few questions about personnel at the
SEC, Mr. Gensler. So let us just start out with the very top,
with you. In 2016, you were the CFO of Hillary Clinton's failed
Presidential campaign. Is that correct?
Mr. Gensler. I was proud to be chief financial officer to
the Clinton campaign.
Senator Vance. Great. Chairman Gensler, is it also correct
that your current enforcement director, Gurbir Grewal, was most
recently the attorney general of New Jersey? A yes or no answer
will suffice.
Mr. Gensler. He served his Nation well, and he was attorney
general of New Jersey.
Senator Vance. So just to recap, the attorney general of
New Jersey is the guy who refused to enforce immigration laws
and cooperate with ICE. He also launched, I believe, eight
separate investigations against Donald Trump during his time as
attorney general.
Chairman Gensler, is it also correct that your recently
hired general counsel, Megan Barbero, was previously deputy
general counsel under Nancy Pelosi and litigated two
impeachment hearings against Donald Trump?
Mr. Gensler. I believe she was deputy general counsel to
the House of Representatives.
Senator Vance. Great. So, and I will also note that one of
your senior enforcement counsels is married to Peter Strzok.
My point here, Mr. Gensler, is that you seem to have a very
troubling pattern of hiring at an impartial regulatory agency a
lot of people who seem to have a vendetta against the former
President. And I fear and I worry that that has implicated
itself and affected the policy at the SEC.
Chairman Gensler, when did the SEC take its first
enforcement action against a SPAC? Do you know the exact time?
Mr. Gensler. Senator, we would have to get back to you. I
don't know what decade that was.
Senator Vance. According to my staff's research, September
of 2021 is the first time that you guys, the SEC, launched
enforcement action against a SPAC. So I want to recap just a
few things, and then I want to ask a question.
First, you were Clinton's finance director in 2016, Hillary
Clinton's finance director. Second, you hired anti-Trump
enforcement director Grewal in July of 2021. Third, you brought
in Ms. Barbero, who was the litigator on two House impeachment
trials against Donald Trump. You have another enforcement
counsel who is married to Peter Strzok.
In November of 2021, Senator Warren urged you to
investigate the SPAC merger involving Donald Trump's Truth
Social company, and in December of 2021, just a few weeks
later, you guys launched an investigation using a novel legal
theory against the former President's social media company.
That is some coincidence, isn't it, Mr. Gensler?
Mr. Gensler. Senator, it is good to meet you in person, but
I think you are not correct.
Senator Vance. What was I not correct about there?
Mr. Gensler. We follow the facts in the law wherever they
are, and with regard to the SPAC field, the Special Purpose
Acquisition Company field, there have been abuses, as you
mentioned, one in 2018 that we found, and there are times that
we do open investigations.
Senator Vance. So the problem that I have, Chairman
Gensler, is not with you investigating SPAC mergers. The
problem is investigating a SPAC merger using a novel legal
theory against your boss Joe Biden's chief political rival.
Also against a social media company, which, of course, at the
time, Twitter and Facebook and every social media company had
banned the former President. So you could make a pretty good
argument that the SEC was using its enforcement powers to
silence the chief political rival of the former--of the current
President.
Now let me just offer another observation here. We are
rightfully concerned in this chamber, at least on my side of
the aisle, about the weaponization of the Department of
Justice. But I am increasingly worried that we should be more
worried about the weaponization of the Securities and Exchange
Commission. It looks more and more like not an impartial
regulatory body protecting investors and consumers, but a
regulatory body that is using its power to silence and
immiserate political rivals of the current President of the
United States.
I have just one final question on that, Chairman Gensler.
Have you ever spoken to anyone at the White House about your
investigation of Donald Trump's Truth Social?
Mr. Gensler. Sir, I don't speak to----
Senator Vance. Yes or no.
Mr. Gensler. I don't--sir, I am going to answer the
question. I don't speak to the White House about anything in
our enforcement group or our investigations.
Senator Vance. So I am mindful of--thank you for the
answer. I am mindful of the time here. So let me just offer one
final observation.
I have little hope that I could persuade you that hiring
committed partisans and using the regulatory powers of the SEC
in a way that looks--and I think is--politically partisan is a
true threat to American democracy, but maybe I can appeal to
your sense of self-interest. If you guys use the SEC in such a
politically motivated way, eventually you are going to be out
of power. And I have to say, Chairman Gensler, turnabout is
fair play.
Thank you, Mr. Chairman.
Mr. Gensler. Can I just, sir, Chair? I am very--I am very
proud of the agency, and I am proud of the Division of
Enforcement and of my fellow commissioners in considering these
matters.
The one matter the Senator mentioned actually was settled
earlier this year, and it was not with the former President. It
is with the company, and it is all a matter of public record,
that settlement.
Chair Brown. Thank you, Chair Gensler.
Senator Van Hollen from Maryland is recognized.
Senator Van Hollen. Thank you, Mr. Chairman.
And thank you, Chairman Gensler, and thank you for your
response to the last question you just received. And I have
known you for a long time, and I have also known you as a
person who always follows the rules and public interest. So I
am glad to have you chairing the SEC, and you have brought a
focus on transparency, to adapting to changing market
conditions, and the needs of the investing public, and I want
to thank you for your efforts to strengthen the rules against
insider trading.
Senator Fischer and I had introduced the bipartisan
legislation urging the SEC to move in that direction, and you
and the others did by tightening the so-called safe harbor rule
to prevent it from being used as a back door for insider
trading.
I also want to commend you on your role, along with the
PCAOB, in implementing the legislation that was passed,
authored by Senator Kennedy and myself, on holding foreign
companies accountable in order to make sure that companies
based in China especially were not using funny accounting rules
to mislead investors about the health of their financial
balance sheets. And Senator Kennedy and I are working now on
the holding foreign insiders accountable legislation, which is
now part of the NDAA. We hope it will pass and look forward to
working with you on implementation.
Now when it comes to greater disclosure and transparency, I
did want to turn to the issue of private equity, and there have
been a number of questions surrounding the need for greater
transparency in private equity, given the size of private
equity in our market, about $20 trillion today. I want to ask
you about an aspect of that that has not come up, which is the
role of sovereign wealth funds investing in private equity.
Because the Congress has tightened the CFIUS rules, we see
less direct foreign investment by China-based sovereign wealth
funds directly into companies. But we have seen a big increase
over the years of investment from sovereign wealth funds or
State-backed investors, such as the State Administration of
Foreign Assets, SAFE, and the China Investment Corporation,
CIC, into private equity.
Now, on the one hand, private equity managers here argue
that these are not voting members, that this is passive
investment, no direct control over the decisions or operations
of these funds. On the other hand, as the size of these
investments grows, a number of people have raised concerns.
In fact, Mr. Chairman, I would like to put into the record
with unanimous consent a Financial Times article dated May 30,
2023, titled ``Has China Become Too Cozy With Private Equity?''
Chair Brown. Without objection, so ordered.
Senator Van Hollen. Thank you, Mr. Chairman.
And in that article, it says that because of the lack of
transparency, it is a black box. This is Lily McElwee, who is a
China expert at the Center for Strategic and International
Studies in Washington. It is not something the U.S. and others
have been able to address, mainly because it is so opaque. That
was the quote from that individual.
The article goes on to point out that we really have no
visibility into these investments and talks about the fact that
especially after the Russian invasion of Ukraine and sanctions
against Russia, this became a more important issue for
investors in private equity.
Could you just talk briefly about how you think about this
right now, both the need for greater disclosure in private
equity broadly, and I know there is an ongoing case, but could
you talk also about this issue of foreign sovereign wealth
funds and their huge investment in private equity and whether
that raises concerns and need for greater transparency?
Mr. Gensler. Under our laws, investment advisers here in
the U.S. can advise asset managers, including sovereign wealth
funds, all around the globe, and if they are properly
registered, the adviser has to be complying with our laws. And
you are right, we do have a recent adopted rule about private
fund adviser transparency.
You are speaking to something about the investors behind
that, which, though we have some role to play at the SEC, is
also a very important role for other agencies, like the
Treasury Department, and as you mentioned, CFIUS is a
collection of other agencies not including the SEC. So I am
sure to be interested to follow up to understand what you are
thinking, whether it is something legislatively or otherwise.
But we, as an agency, are neutral about which investors
from which countries the investment adviser is advising. Our
jurisdiction doesn't really go there, as long as they are
complying with anti-money laundering laws and the like.
Senator Van Hollen. I do look forward to following up.
Chair Brown. Thank you, Senator Van Hollen.
Senator Lummis of Wyoming is recognized.
Senator Lummis. Thank you, Mr. Chairman.
And welcome, Mr. Gensler. My questions are substantially
nerdier than my colleagues', but nevertheless, I think they are
really important. I am going to start with Staff Accounting
Bulletin 121, which you know I have been harping on for about a
year in relation to the Lummis-Gillibrand Responsible Financial
Innovation Act.
So Staff Accounting Bulletin 121 requires that companies,
including banks, place crypto assets under custody on their
balance sheets. And even Fed Chairman Powell has agreed that
this is unprecedented in financial regulation in the United
States.
So my first question is you have said repeatedly that this
is to provide greater consumer protection. And like we saw in
the Celsius bankruptcy last year when thousands of customers
were made unsecured creditors, isn't it true that placing
custody assets on the company's balance sheet could result in
consumer assets being seized by creditors in the event of a
bankruptcy and that that would hurt consumers?
Mr. Gensler. Senator, thank you for actually going down, as
you say----
Senator Lummis. The rabbit hole.
Mr. Gensler. ----the more technical rabbit holes. And I
will be glad to go there.
It is actually you are absolutely right about the Celsius
finding. But what was interesting in that bankruptcy finding is
a judge said these are not segregated protected assets. By and
large that the investors were just lining up in bankruptcy, and
that was regardless of a staff accounting bulletin that the SEC
put out because Celsius was a private company. The staff
accounting bulletin was staff advice on how to do accounting in
public companies.
And the reason the staff came to that conclusion, which is
different than for stocks and our bonds in custody, is because
the laws in the U.S. right now tend to be that you can't
segregate, readily, easily segregate those crypto assets the
way Celsius was taking it on. And that judge said you are just
in line.
And by the way, that has also happened at Voyager. It has
happened at FTX. It has happened at Terra Luna. It has happened
at each of these various bankruptcies.
Senator Lummis. Well, let us then talk about the
relationship of Bulletin 121 to banks. So the requirement
prevents banks from offering crypto asset custody because it
requires the assets to be backed one-for-one by U.S. dollars.
And if that standard were applied to legacy custody banks, like
BNY Mellon, they would have to have trillions in regulatory
capital. So that prevents the most heavily regulated financial
institutions in the country from offering custody.
So if your ultimate goal is to provide real consumer
protection, shouldn't the SEC withdraw Staff Accounting
Bulletin 121 to allow banks to provide custody?
Mr. Gensler. So the staff accounting bulletin is just about
public companies and how to properly show that to investors in
those banks, and it is investors, not the people getting the
custody. The bank regulators are free to address how they treat
capital however they wish to treat capital. But this is just
about does the balance sheet have those custody crypto as a
liability, but they also have the crypto as an asset?
We don't speak to how it is backed. That is up to the bank
regulators.
Senator Lummis. OK, thank you. I want to turn to the SEC's
pace of rulemaking.
Let us use, for example, the proposal on the use of
predictive data analytics to regulate not just AI, but an
overly broad description of covered technology encompassing all
uses of technology in a firm down to adding together numbers in
a spreadsheet. Even numbers in a financial firm pass through
spreadsheets, so my concern here is this rule is going to
follow the pattern of others, such as the money market fund
reforms proposal, where unworkability means the end rule looks
very different from the proposal.
The documentation requirements of this rule are so
demanding that the industry will not be able to comply. So will
you commit to reproposing the use of predictive data analytics
rule if or, rather, when the Commission arrives at a different
approach?
Chair Brown. And be brief in your answer, Chair Gensler.
Mr. Gensler. Again, we take public comments serious. If we
make adjustments, it is based upon whether it has been properly
noticed, and it is a logical outgrowth. And so we commit to
taking public comments seriously.
Chair Brown. Thank you, Senator Lummis.
Senator Smith from Minnesota is recognized from her office.
Senator Smith. Thank you, Mr. Chairman and Ranking Member.
And thanks so much, Chair Gensler, for joining our
Committee today.
Chair Gensler, when you were here last fall, I asked you
about the materiality of climate risk disclosures, and I think
that you very effectively explained why this information is
relevant to investors so that they have good information and
can make informed decisions about their investments. And so it
has been a year, and meanwhile, the rest of the world is moving
forward. The EU and the U.K. and the International
Sustainability Standards Board have all recently taken steps to
implement robust climate disclosure standards.
And of course, this will be reverberating across the globe
economically. In fact, it is estimated that 3,000 U.S.
companies will be subject to these EU standards. So my
question, Chair Gensler, is I understand that you can't comment
on ongoing deliberations, but could you comment on how you see
U.S. leadership on this issue, why you think this is important,
and what level of urgency you feel to complete this rulemaking
process?
Mr. Gensler. I thank you. It is really about bringing
comparability and consistency to that which is already
happening, that many U.S. issuers are already disclosing
climate risk information, and investors are making investment
decisions. And so we just look at it really within that
decades-old tradition that the SEC addresses itself to material
disclosures and comparability.
Senator Smith. And to this point of sort of urgency of
establishing and making clear what that comparable standard is,
what people can--what standard and expectations we should have
around disclosures, when do you think this might be done?
Mr. Gensler. Again, we try not to do things against a
clock. It is really when the staff is ready and the Commission
is ready. We got about 16,000 public comments. The private
funds rule that was being discussed a little earlier took us
about 19 months or so from proposal to adoption.
But again, I don't want to predict on this one. There is a
very heavy comment file, and really important issues have been
raised around the discussion I had with Senator Tester earlier
about Scope 3, but over a number of other matters as well. And
we are looking at staff recommendations on how to deal with
those comments.
Senator Smith. OK. Thank you.
I want to dive in on a--I was smiling to myself as Senator
Lummis was talking about getting nerdy on you. So I am going to
dive in to my last question on something that is maybe equally
nerdy, but really important.
As you know, the Registration for Index-Linked Annuities
Act, which I led with Senator Tillis, was enacted last year.
And what this legislation does, pretty simply, is require a
tailored registration form for these kinds of index-linked
annuities so that consumers that want to purchase these
products have good, clear, concise information.
So I want to thank you and your staff for working with us
on this legislation and its implementation, and I am wondering
if you could share any updates for us on how that is going and
when we might be able to expect a first draft?
Mr. Gensler. It is going well. Congress also set a deadline
of, I think, a total of 18 months to not only get a proposal,
but to get a final. But one of the pieces that we are working
on is Congress also in that legislation that you coauthored, we
had to do some investor testing. And so there is two pieces. It
is the investor testing, and it is also the proposal, bringing
that up to my fellow commissioners, trying to vote it out, get
public comment, and also with an eye toward adoption in the
full 18 months that you had laid out.
Senator Smith. Well, thank you, Chair Gensler. I appreciate
your attention to that.
Mr. Chair, I cede back my time.
Senator Sinema [presiding]. Thank you, Senator Smith.
The chair recognizes Senator Britt.
Senator Britt. Thank you, Madam Chairman.
Chair Gensler, thank you for being here today. We have
heard a lot of various things on both sides of the aisle, but
particularly over here about aggressive rulemaking and that
agenda.
Over the last 2 years, the SEC has proposed nearly double
the number of rules that your two predecessors proposed within
the same amount of time. The only time we have seen this pace
of activity is when the SEC was implementing Dodd-Frank, those
provisions after the financial crisis.
So the difference here is that your agenda is not being
driven by congressional mandate or widespread market failures
like we saw in 2008, and that makes me concerned. In fact, it
is quite the contrary. Eighty-three percent of your proposals
are not required by Congress, and we have yet to see a market
failure that warrants this many new proposals and regulations.
Even your own former inspector general raised concerns
about the pace of the activity within your agency and said
staffing issues may affect the quality of these rulemakings.
To add to this, I believe you have failed to provide the
public with justification for these sweeping regulations and
have failed to allow for robust public comment period due to
fully understand the broad implications on the market. It makes
me think what constituency is the SEC actually listening to? I
don't believe it is the average mom and pop or a 401(k)
investor in the State of Alabama. It seems to be a small
handful of politically aligned investors.
It is my belief that we want to encourage people to go
public so that more people have an opportunity to invest and
share in the fruitfulness of the market. I am concerned that
some of the things that are going on are going to actually
deter people from doing just that.
There are countless examples that we have seen, but I want
to ask you about the anticipated proposal that I heard Senator
Warner ask you about, the human capital disclosure. So when can
we expect to see that proposal issued?
Mr. Gensler. Thank you. It is good to meet you.
Senator Britt. It is nice to meet you as well.
Mr. Gensler. I worked a lot with the former Senator from
your great State, Senator Shelby.
Senator Britt. Absolutely.
Mr. Gensler. Again, we don't do things so much against a
clock. We wanted to see what those first couple of years of
filings look like. Chair Clayton and the SEC put something in
in 2020. We looked at those, we looked at the data, and the
staff is working through recommendations.
Senator Britt. So tell me on that, actually. So August 2020
is when that was implemented. It seems that when you look at
that, we have had a 3-year time period, but the vast majority
of that has been during the COVID time period, and the
implications on workforce and these things may not be an
adequate representation of what they may be in the future.
Do you agree with that?
Mr. Gensler. Well, I think it was a very unusual time for
our Nation for sure. But this is about the public filings and
seeing how public companies had adjusted their disclosures
based on that.
Senator Britt. So what is missing from your perspective
from the 2020 implementation that needs to be adjusted or
expanded here?
Mr. Gensler. What staff is looking at is the filings and
how--how those disclosures are informing investors about a very
important material asset, the human capital itself. And it is
around, possibly around the total dollars spent on workforce
and the turnover and things like that.
Senator Britt. So we don't know when you are going to
actually--when we will see that is what you said? I am clear on
that, right?
Mr. Gensler. Yes, that is correct.
Senator Britt. OK. And then, but once you bring it forth,
how long do you expect to leave the public comment period open
for such an important rule?
Mr. Gensler. Well, we will make that determination at the
time, but all of our----
Senator Britt. What is the threshold? Can you help me with
that?
Mr. Gensler. So all of them since January of '22 have been
out for comment at least for 60 days from when we vote it out
of the Commission.
Senator Britt. Really?
Mr. Gensler. And so, and on average, it has been about 70.
And I would say even beyond that, because it takes 12 to 24
months to finalize a rule, we continue to take meetings. We
continue to take comments, and staff considers those comments.
Senator Britt. I am running out of time. So I will make it
quick, last question. Can we expect to see a proper, robust
cost-benefit analysis when you do release this?
Obviously, we have been talking about it or hearing you
talk about it for 2 years. I am hopeful that you will truly
take into account the downstream effects of whatever you
propose. I think that some of the things that we have seen, in
my opinion, have been half-baked, and I am hopeful that
something with such large implications that we will see a very
thorough analysis and how it goes all the way down to a lot of
the smaller entities that I am concerned about.
Mr. Gensler. We do robust economic analysis on each of the
rules. Thank you.
Senator Britt. Appreciate your time.
Senator Sinema. Thank you, Senator Britt.
I recognize myself. Chairman Gensler, it is good to see
you. I have several questions for you today and limited time.
So please keep your answers concise and specific. I hope I
don't have to, but I will interrupt if needed to keep moving
on.
A year ago in October '22, the SEC's Office of IG provided
its annual report on the most serious management and
performance challenges at your agency. Members of various
divisions in your organization raised concerns about resource
management due to the increase in the SEC's rulemaking
activities.
As we have discussed, I appreciate your desire to protect
consumers and investors and your goal of ensuring that the U.S.
capital markets remain the most sophisticated and best in
class. These are broad goals that are good for business and
good for our country, but how we accomplish those goals
matters.
The IG report illustrates an SEC with a marked increase in
attrition, difficulty in hiring qualified talent, and
overreliance on detailees with no rulemaking experience. These
are fundamental problems that call into question the quality of
rulemaking that the agency is capable of producing.
Now, ambitious agendas under these constraints can result
in poorly written rules that can hurt Arizonans' access to
economic opportunity. So what have you done since October of
'22 to address these management challenges?
Mr. Gensler. Part of it is, with Congress' help, is hiring
more people. I am very proud to say that the partnership of
private--Partnership for Public Service actually looked at us,
and we went up in the ratings, that we are the third-highest
rated agency. But you are right. Attrition has moved up, and
our attrition moved up in part because it is a very tight job
market, and we are about 6 or 7 percent attrition. That means
the average employee stays about 16 years.
Senator Sinema. I would like my staff to be briefed by your
staff in terms of the specific progress that you have made. So
I will have my team follow up with you.
Mr. Gensler. I thank you for that.
Senator Sinema. Your own division managers raised these
bandwidth concerns with the IG, and do you assess whether or
not a division has adequate bandwidth to conduct a particular
rulemaking before directing them to engage in that rulemaking?
And if so, how do you make that assessment?
Mr. Gensler. We do it with--each of the main divisions--
Investment Management, Trading and Markets, Corporate Finance--
have a rule team, and we do that with the leads of those rule
teams that are career staff. And we also do it with the
Division of Economic Risk Analysis about their bandwidth, as
you say, in each of those groups.
Senator Sinema. The IG report also cites shortened
timelines during the drafting process and shortened public
comment periods as factors that your staff indicate may be
resulting in less feedback during this process. We have spoken
about this before.
I want to ensure that stakeholders and the public have time
to weigh in on these actions. As we have discussed, more
sophisticated firms have armies of attorneys on retainer, but
small businesses and retail investors need more than 30 days or
60 days to understand the impact on their business and provide
feedback, particularly since these rulemakings are very
complex, and there are multiple rulemaking processes happening
at the same time.
So does your agency value hearing from small businesses and
retail investors, and how are you ensuring that they have
adequate time and the use of their own resources to provide
feedback on your agency's actions?
Mr. Gensler. We do value the input of small businesses, of
everyday investors. We reach out in many ways, through social
media and elsewhere, to try to encourage people to comment on
our rules.
And I would note this for the public, whether large,
sophisticated investors or everyday investors, we continue to
take meetings and continue to get comments during these what is
generally a year to 2-year processes, and they are very
beneficial to us.
Senator Sinema. The SEC staff also raised concerns that the
increase in rulemaking activities had resulted in a tradeoff in
other mission-related work because they have had to borrow
staff to do their work. Has bandwidth allocated to increase
rulemaking traded off with your bandwidth for enforcement?
Mr. Gensler. I think the biggest tradeoff is that we shrank
from 2016 to 2021, and we are only right now about 3 percent
larger than we were 7 years ago. But our Enforcement Division
of about 1,300 people, which is about a quarter of our overall
staff, it is not a tradeoff because our policy shops are in
different parts of the agency.
Senator Sinema. So my last question is your staff raised
concerns with the IG that when moving more aggressively with
rulemaking, the SEC is opening itself up to increase litigation
risk. We have seen some recent legal setbacks for the agency,
particularly in respect to cryptocurrency.
So how are you assessing the agency's litigation risk with
respect to the breadth of your rulemaking strategy?
Mr. Gensler. We take Congress' mandates to us and the
authorities we have very seriously, but also how the courts
interpret them. And we are dedicated and committed to doing
things just within our authorities and how the courts interpret
it, but we get a lot of feedback also from the public on that.
Senator Sinema. My time has expired. I will follow up in
further questions later.
Senator Daines, you are recognized.
Senator Daines. Thank you, Senator Sinema.
Chairman Gensler, I want to start by expressing my ongoing
concerns with this really unprecedented rulemaking agenda you
have pursued since taking over at the SEC. I remember when I
ran for Congress the first time back in 2012, we talked about
the rising power of the fourth branch of Government, this
Executive branch is now that I believe if a Founding Father saw
what is going on would say there is way too much power and
rulemaking by fiat going on there and really lawmaking.
Whether it be your crusade against digital assets or your
attempts to use the SEC to further the Administration's climate
agenda at the expense of taxpayers, there appears to be hardly
a sector of the U.S. economy that you view as out of reach of
your rulemaking authority. In the nearly 28 months you have
been in office, the SEC has proposed or finalized 47
substantive rulemakings. Of these rulemakings, more than 80
percent were not required by congressional statute.
This means that the vast majority of the agency's
rulemaking agenda has been voluntarily undertaken. Chairman
Gensler, you are not an elected official that is beholden to
your constituents. You are an unelected bureaucrat who has
taken it upon himself to reshape American financial markets to
your liking, to the detriment of innovation, of investors and
small businesses.
One such rule that is facing broad opposition from across
the ideological spectrum, left and right, is the agency's swing
pricing proposal. I have heard many concerns that the SEC's
swing pricing is both unworkable and extremely harmful for
Montana seniors and individual investors. A hard close would
also create significant and unavoidable disparities between
investors based on their geographic location as well as their
investment type.
Even far left groups like the Consumer Federation of
America have expressed opposition to the proposal, noting that
``The tangible and significant costs associated with the
proposed implementation of swing pricing are very likely to
outweigh any perceived benefits.''
Given the broad bipartisan agreement that swing pricing
will impose significant costs on investors with limited
benefits to the broader markets, do you still intend to advance
this rule in the face of what I would argue is overwhelming
opposition?
Mr. Gensler. If I might, I just want to mention something
in a generic. We have about 50 policies on the agenda, 50
projects on the agenda. My immediate predecessor, Chair
Clayton, successfully finalized 64 adopting rules. It may be
that you and I might have differences on the policies, but it
is not out of line with what happens.
In terms of your specific question with regard to this
rule, you are right. We have gotten significant feedback. There
is kind of three pieces. There is about the liquidity of the
underlying funds, there was the swing pricing, and then a third
thing about the sort of back office plumbing, but really
relevant to this hard close.
And we got some very significant comments, particularly on
the swing pricing and hard close, and we are taking a very
close look at that to see what is appropriate and whether to
make adjustments. And as we go along, I can't pre-commit
whether we will finalize or not.
Senator Daines. I want to talk about the SEC's--and by the
way, that comment I made about the rising power of the fourth
branch, that is a bipartisan comment. Whether it is Republicans
in charge or Democrats in charge, I truly believe if the
Founding Fathers were here today, they would say there is way
too much power.
Mr. Gensler. There is probably a lot they wouldn't
recognize.
Senator Daines. Really too much law-making authority done
through executive fiat that occurs in a bureaucratic branch of
Government.
Turn to the SEC's proposed rule requiring disclosure of
financed emissions. One significant impact of this rule is it
will likely lead to widely inaccurate disclosures that will be
of little practical use to investors. It appears to me this is
just another step in the agenda to discourage investment and
access to finance from legal industries to drive an ideology. I
have serious concerns that you even have the legal authority to
enact such a rule, and I would urge you to withdraw this rule.
My question then is what would give the SEC authority to
circumvent Congress and enact rules by executive fiat?
Mr. Gensler. So we do all that we do, and this climate risk
rule included, based upon Congress' authority. This is built on
multi-decades' authority about disclosure. And in fact,
President Roosevelt called the initial bill the Truth in
Securities Act. And nothing could be further from the truth. We
have no climate agenda whatsoever. We are not a climate
regulator, sir.
But over 80 percent of the top 1,000 companies in 2021 have
been making climate risk disclosures, and 55 percent, I think,
making greenhouse gas disclosures. So it is trying to build
some comparability of that which is already happening. We have
got a lot of feedback. We are going to have to look at that
feedback. We are going to have to think about what to do with
so-called Scope 3, as Senator Tester and I talked about.
We are going to have to think about a lot of other pieces
of this. But it is trying to bring comparability to that which
is already happening. We are not a climate regulator, sir.
Senator Daines. I am out of time. Thank you.
Senator Sinema. Senator Reed.
Senator Reed. Thank you very much, Madam Chairman.
Mr. Chairman, welcome. Could you give a description of the
growth, the size, and the power of the private equity sector
over the last 25 years? How they have moved into banking,
insurance, real estate, a host of other things. And do you
believe that these entities are now competitive to banks and
the large banks and also potentially systemic risk?
Mr. Gensler. The private funds business, not just private
equity, but hedge funds and venture capital, is about $26
trillion or $27 trillion of assets under management. Twenty-
five years ago, there was a report I helped, as a staffer
helped write it. So I remember this, the President's working
group report after long-term capital management failed.
And at that point in time, the entire field was less than
$1 trillion. So it has grown significantly. In terms of its
comparison to banking, the total commercial banking sector in
the U.S. is about $23 trillion. And again, you heard the
numbers I just said about this sector.
And it can be systemically important. It was systemically
important 25 years ago when long-term capital management was
teetering on the brink of failure. The field is systemically
important today.
Senator Reed. Now are advisers to public funds required to
maintain AML, anti-money laundering programs, know their
customers, and file suspicious activity reports as banks are
required to do? And if not, are you concerned about this?
Particularly, with some discussion that reports of Chinese
Communist Party-linked companies and Russian oligarchs using
private equity funds to invest.
Mr. Gensler. The Bank Secrecy Act gives key authorities to
both the U.S. Treasury, but also we have some authorities, and
we have been working alongside of them. The answer is, is they
have certain responsibilities. The investment advisers have
certain responsibilities with regard to these funds, but we are
in discussions about whether there might be important further
steps to take consistent with the Bank Secrecy Act.
Senator Reed. Now since these funds and the private funds--
both hedge funds, private equity, et cetera--are, as you have
indicated, the larger ones, systemically important, should they
report publicly as our public companies do? I mean, they
control as much and one might say even have more leverage over
the economy than some of the publicly reporting companies?
Mr. Gensler. It would be a choice of Congress. Our
disclosure regime is for public companies where there is over a
certain number of investors or if you are listed on the New
York Stock Exchange. These private funds are private in part
because they are not listed on the stock exchanges, and they
don't have over a certain number of investors.
So the disclosure that we recently adopted a rule is just
further disclosure to their investors around their fees, their
performance, their side letters. But again, Congress could
decide to broaden that out.
Senator Reed. And would you think that would be an
appropriate response or----
Mr. Gensler. We are a disclosure-based agency, and it is
about the investors and the investors getting sufficient
information to make informed investment decisions. And that is
partly why we finalized the rule that we did recently is just
for those limited partners, those investors to get further
information.
I think, Senator, you are asking about whether there is
broader public disclosure.
Senator Reed. Right.
Mr. Gensler. Which would be we would stand ready if that is
what Congress desired.
Senator Reed. Finally, these reports that Communist Chinese
elements are using private vehicles and Russian oligarchs, does
that concern you, and what are you doing if it does?
Mr. Gensler. As a general matter, I think we all probably
share a concern about bad actors, whether they be State actors
or non-State actors, that use our capital markets for nefarious
means. And we do work with other agencies of the U.S.
Government from time to time around matters of concern and, as
we earlier talked about, really working with our colleagues at
the Department of Treasury around anti-money laundering and the
Bank Secrecy Act in the investment adviser space.
Senator Reed. Thank you very much, Mr. Chairman.
Thank you, Madam.
Senator Sinema. One moment.
[Pause.]
Senator Sinema. Thank you, Chair Gensler, for your
testimony today.
For Senators who wish to submit questions for the record,
those questions are due 1 week from today on Tuesday, September
19. The witness will have 45 days to respond to any questions.
Thank you again.
With that, the hearing is adjourned.
[Whereupon, at 12:04 p.m., the hearing was adjourned.]
[Prepared statements, responses to written questions, and
additional material supplied for the record follow:]
PREPARED STATEMENT OF CHAIR SHERROD BROWN
I call this hearing to order, and welcome our witnesses.
Welcome back Chair Gensler.
Americans count on our markets to provide for their futures. But
for too long, our markets and financial regulators have answered to the
interests of the powerful few on Wall Street--big banks, private fund
managers, and corporate executives, looking to keep profits for
themselves instead of investing in their workers, and in innovation,
and in American prosperity.
New technologies risk further concentrating power on Wall Street at
the expense of American savers.
Meanwhile, fraudsters are using cyberattacks and ``deep fake'' AI
technologies to scam American savers.
Faced with an unfair playing field that favors entrenched, wealthy
interests over hardworking Americans, the SEC has its work cut out for
it--to protect families whose hard-earned savings are invested in the
markets.
But many on Wall Street have suggested that the SEC has been moving
too fast recently.
We've heard all the complaints, and I'm sure we'll hear them again
today--too many rules, too fast, too hard to comply with.
But America's markets are the greatest in the world because we have
strong investor protections--and because we have effective regulators
who work to make sure we have transparent, fair, and honest markets
that Americans deserve.
And we know all too well what happens when regulators--at the
behest of lobbyists and the politicians who always do their bidding--
ignore changes or are too slow to respond.
It was 15 years ago this week that Lehman Brothers collapsed--
putting us in the middle of a financial crisis because industry ran
wild.
Look at the private funds rule the SEC recently finalized:
Private equity and hedge funds managed tens of trillions of dollars
in assets at the end of last year for pension funds and endowments and
now even some retirement savers.
Private equity firms alone control somewhere between 15 and 20
percent of our whole economy--and that number is going up every year.
But all the Americans whose savings are controlled by these opaque
firms haven't been able to get much information about how they're using
people's money--fees, comparable performance data, independent audits,
disclosure of conflicts of interests by fund managers.
Americans have been in the dark about all of it--until now. The
private funds rule will change that, and force them to tell people how
much money these private equity firms are charging.
It should be no surprise that the groups that complained the
proposed rule was too strong, too hard to comply with, and unnecessary,
waited only days before running to their venue of choice--the Fifth
Circuit Court of Appeals.
Of course it's always the fifth circuit--the most extreme and
partisan circuit in America.
It's the same playbook we see over and over--Wall Street and
corporate interests trying to use the courts to go around the public.
So of course we wonder: what else are these companies trying to
hide?
Trillions in stock buybacks, for one thing.
It's why the SEC update of corporate buyback disclosure will also
provide much needed data on how executives are allocating corporate
resources.
That increased transparency will combine with our first-ever tax on
corporate stock buybacks. Together, they should encourage companies to
stop throwing trillions of dollars at buybacks that enrich executives,
and start investing in their workers and innovation.
The Commission also took important steps to address fraud and
increase executive accountability.
Under your leadership, the SEC finally took steps to complete two
safeguards required under the Dodd-Frank Act. The first was proposing a
rule prohibiting conflicts of interest in the market for mortgage-
backed and asset-backed securities.
While that sounds technical--during the Financial Crisis of 2008
Wall Street banks and predatory hedge funds bet against the U.S.
housing market and caused billions in damage.
The second Dodd-Frank provision requires companies to work to claw
back compensation from executives who earned bonuses based on flawed
financial results.
This Committee has also been working to enhance executive
accountability by recently passing--by a vote of 21 to 2--a bipartisan
bill to hold bank executives responsible when they mismanage their
banks. I look forward to the RECOUP Act passing the Senate and becoming
law.
In the past year, the SEC also advanced transparency by requiring
companies to notify the market when they experience cyberattacks.
We all know this is a growing risk to every industry, and now there
is standard that ensures investors and policymakers know when these
potentially devastating hacks occur.
Of course, the SEC has continued to pursue enforcement actions
against all kinds of scam artists--those that target vulnerable
investors, people who try to get away with insider trading, and crypto
fraudsters.
You have been busy. And there is more work to do to protect
American savers.
We know the SEC is looking ahead at emerging risks posed by new
technologies, including machine learning and artificial intelligence.
The SEC must make sure that brokers and investment advisers put
customers first when they use new technologies. This Committee will be
discussing the impact of AI on financial markets and consumers in the
coming weeks.
I am eager to see the SEC finalize its climate disclosure rule.
There has been significant opposition to the proposal, but the
transparency it will provide will be valuable to investors.
Just last week, this Committee heard testimony about the challenges
in the property insurance market. The increase in climate events every
year--fifteen $1 billion events so far this year--is well documented.
Those climate events affect businesses, too--that destruction hits
factories and infrastructure and puts workers at risk.
So, it is clear why investors are demanding this information; they
deserve to get it.
And we only need to look to events in the crypto markets in the
past year to see what happens when markets lack transparency and
conflicts go unchecked. Americans lose money.
Since you testified last year, the FTX collapse showed how
dangerous crypto can be.
But FTX wasn't a lone bad apple--it was just the most explosive
example of the problems in crypto. It seems like every day, before and
after the collapse of FTX, there is another crypto scam, hack, or
insider taking advantage of people--and another few million dollars
lost.
That's because the problems we saw at FTX are everywhere in
crypto--the failure to provide real disclosure, the conflicts of
interest, the risky bets with customer money that was supposed to be
safe. FTX was just the biggest and the ugliest. For consumers, it adds
up to billions of dollars gone.
Meanwhile, bad actors keep flocking to crypto. They use it to
launder money, evade sanctions, fund crime and human trafficking and
terrorism.
We need to protect workers and families in these markets and clean
up the scams and frauds. As Congress considers digital asset
legislation, I'm glad the SEC is using its tools to crack down on abuse
and enforce the law.
Chair Gensler, as our economy and markets move forward, the SEC
must keep moving forward and put American savers first. Americans who
work hard and scrimp to save for their families' futures deserve to
invest their savings in markets that are fair, honest, and transparent.
I look forward to hearing more from you about how the SEC is working to
protect American investors.
______
PREPARED STATEMENT OF SENATOR TIM SCOTT
I've been calling for this hearing since February 14th, when this
Committee held an oversight hearing on the FTX crypto crash. A lot has
happened since your appearance last September. We experienced several
bank failures, and in response, this Committee called up the relevant
financial institutions and regulators to hold them accountable for
their actions. But, when it comes to the SEC, we've had to wait a whole
year to speak with you in person--even when a company like FTX
collapses, we still have to wait.
As SEC Chair, your goal should be to fuel competition and
innovation in the marketplace and expand the ability of Americans from
all walks of life--whether that be a Boeing aircraft mechanic in North
Charleston or a soybean farmer in Fort Dodge, Iowa--to access a wide
spectrum of investment options for their hard-earned dollars. Without
pro-growth regulations we are limiting opportunities for our kids, and
our kids' kids, from being able to take control of their own financial
futures. That's why it's especially troubling, that under your
leadership, the SEC has failed to implement these types of pro-growth
rules. Instead, your agency has churned out a seemingly endless
assembly line of new and unneeded regulatory hurdles to capital
formation and market access.
Rulemakings must be done in a thorough, transparent manner, which
includes responsiveness to Congressional oversight, including from the
minority Members of this Committee. The American people have a right to
know what their Government is doing, and your agency's blatant refusal
to respond to our Constitutionally mandated oversight represents a
dereliction of your duties to the American people.
Throughout my time in Congress, I've prioritized enacting policies
that open more doors to opportunity for future generations and give
Americans in every corner of the United States the chance to better
their economic standing and build generational wealth. It is clear
under this Administration, and under your time as SEC Chairman, that
regulation, not innovation, is the preferred medicine for every
perceived policy injury. This should not be the case.
In his questioning, Ranking Member Scott called out Chair Gensler
for his failure to allow for a reasonable amount of time for the public
to provide input on proposed rules and for the widespread impact and
confusion created by agency's proposed rules on everyday American
investors. Excerpts from Ranking Member Scott's questioning are below,
and full remarks are here.
Relatedly, despite your reassurances that the public--especially
the millions of everyday investors most directly impacted by these
proposals--would have sufficient opportunity to provide feedback
through the notice and comment process, your agency provided just over
90 days to sift through nearly 1,700 pages of four proposed rules,
wrapped into one proposal. This same proposal included roughly 1,200
questions from your staff for industry feedback. If you have over a
thousand questions, I fail to see how you can say, with a straight
face, that you have issued a proposed rule and not a request for
information.
According to the Committee on Capital Markets, under your
leadership, the SEC has put forward 47 proposals and adopted 22 of them
in the first several months of your leadership. What's even more
troubling, is these rules stand to completely change our capital market
structure, which benefits the average investor more today than at any
other point in history. The breakneck pace you are pumping out
regulations should not be applauded. The regulations the SEC has
proposed under your leadership are unjustified and are sowing discord
and confusion for industry and market participants alike. How do you
square your mission, which includes maintaining ``fair, orderly and
efficient markets'' with the upheaval of market functioning you aim to
create?
______
PREPARED STATEMENT OF GARY GENSLER
Chair, U.S. Securities and Exchange Commission
September 12, 2023
Good morning, Chairman Brown, Ranking Member Scott, and Members of
the Committee. Thank you for inviting me to testify today. As is
customary, I'd like to note that my views are my own as Chair of the
Securities and Exchange Commission, and I am not speaking on behalf of
my fellow Commissioners or the SEC staff.
Protecting the Public for 90 Years
For 90 years, the Federal securities laws and the SEC's work to
oversee them have played a crucial role for the public both in good
times and in times of stress. The core principles of U.S. securities
markets regulation have contributed to America's economic success and
geopolitical standing around the globe.
At this remarkable agency, we serve investors building for a better
future and issuers raising money to fund innovation, while overseeing
the $100 trillion capital markets where they meet. The essence of this
is captured in our three-part mission to protect investors, maintain
fair, orderly, and efficient markets, and facilitate capital formation.
The SEC is the cop on the beat watching out for your constituents.
In the last year, we've filed approximately 750 enforcement actions and
conducted approximately 3,000 examinations of registrants. We engage
with more than 40,000 registrants--asset managers, brokers, dealers,
exchanges, fund complexes, public companies, and many more.
The dedicated staff of this agency does extraordinary work with
limited resources. In the face of significant growth in registrants,
more involvement in our markets from individual investors, and
increased complexity, the SEC's headcount actually shrank from 2016
through last year. The SEC this year is expected to be approximately
three percent larger than it was in FY 2016.
I am proud of this agency. This year we were named the third-best
place to work among midsized Federal agencies, building on our ranking
in the top five for the previous 5 years. \1\
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\1\ See Partnership for Public Service, ``Best Places To Work in
the Federal Government: Securities and Exchange Commission'' (March 29,
2023), available at https://bestplacestowork.org/rankings/detail/
?c=SE00.
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Updating Our Rules To Meet the Challenges of Our Time
We are blessed with the largest, most sophisticated, and most
innovative capital markets in the world. But we cannot take this for
granted. Even a gold medalist must keep training. As a seminal SEC
report in 1963 said, ``no regulation can be static in a dynamic
society.'' The report continued, ``unanticipated changes in the markets
and the broader public participation should be accompanied by
corresponding investor protection.'' \2\
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\2\ See ``Report of Special Study of Securities Markets of the
Securities and Exchange Commission'' (1963), p. IV, available at
https://www.sechistorical.org/collection/papers/1960/1963-SSMkt-
Chapter-01-1.pdf.
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Six decades after the publication of that Special Study, that core
idea still rings so true. That's why we're updating our rules for the
technology and business models of the 2020s. That's why we're updating
our rules to promote the efficiency, integrity, and resiliency of the
markets. We do so with an eye toward investors and issuers alike, to
ensure the markets work for them and not the other way around.
Focusing on the efficiency, integrity, and resiliency of markets
helps lower costs. It enhances access and promotes financial stability.
It encourages competition while at the same time lowering the fragility
of the system. Two years ago, we laid out a unified regulatory agenda
to do just that. \3\ Included in that agenda were 10 items related to
Congressional mandates, most from the Dodd-Frank Wall Street Reform and
Consumer Protection Act and one from the Holding Foreign Companies
Accountable Act. There were also items exercising new authorities
granted under Dodd-Frank.
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\3\ See Office of Management and Budget, ``Agency Rule List--
Spring 2021'' available at https://www.reginfo.gov/public/do/
eAgendaHistory.
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Each of the subsequent proposals we've made further our three-part
mission and are based upon authorities granted by Congress. Our
Division of Economic and Risk Analysis provides robust economic
analyses, which consider costs and benefits as well as effects on
efficiency, competition, and capital formation.
We greatly benefit from public input regarding the economics, the
policies themselves, and the SEC's legal authorities. In the last 2
years, we have provided the public ample time to comment, with an
average of 70 days to comment from the time a proposal is published on
our website. Since January 2022, we have provided a minimum of 60 days
with some as long as 100-plus days from the day we a proposal is posted
on our website.
In the last 2 years, we also reopened 18 of our rules for further
public comment. When comment periods close, we often continue to get
additional comments, through meetings and otherwise, which staff has
considered as well.
Based on the public feedback, the staff and the Commission consider
possible adjustments to the proposals and whether it's appropriate to
move forward to a final adoption. This process generally takes 12-24
months, and we move to adopt rules only when the staff and the
Commission think they are ready to be considered. We're focused on
getting things right--based upon the economics, the Commission's legal
authorities, and promoting the SEC's mission--not the clock.
The SEC now has issued proposals for most of that unified agenda we
laid out 2 years ago. We also have finalized 22 rulemakings, nearly all
of which have changed based on public feedback. A recent news article
notes that this number of finalized rules is less than a number of my
predecessors in a comparable timeframe. \4\
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\4\ See Andrew Ramonas, Bloomberg Law, ``Gensler Lags
Predecessors in SEC Rulemaking as ESG Plans Linger'' (Aug. 29, 2023),
available at https://www.bloomberglaw.com/product/blaw/
bloomberglawnews/securities-law/.
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In ensuring that markets best serve investors and issuers alike,
the middle part of our mission speaks to promoting fair, orderly, and
efficient markets. I'll speak to our work to enhance the efficiency,
integrity, and resiliency of the markets.
Efficiency and Competition
Congress both in the 1970s and again in the 1990s updated the
securities laws, giving the SEC a specific role to promote competition
and efficiency. In particular in 1996, Congress mandated that, in
addition to investor protection and public interest, the SEC consider
efficiency and competition, as well as capital formation, in
formulating our rules. \5\ Congress understood that lowering the cost
in the middle of our capital markets would help lower costs for issuers
and raise returns for investors.
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\5\ See Gary Gensler, `` `Competition and the Two SECs': Remarks
Before the SIFMA Annual Meeting'' (Oct. 24, 2022), available at https:/
/www.sec.gov/news/speech/gensler-sifma-speech-102422.
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In that context, we have put out to public comment proposals
regarding securities lending, \6\ short sale disclosures, \7\ and large
position reporting for securities-based swaps. \8\
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\6\ See Securities and Exchange Commission, ``SEC Proposes Rule
To Provide Transparency in the Securities Lending Market'' (Nov. 18,
2021), available at https://www.sec.gov/news/press-release/2021-239.
\7\ See Securities and Exchange Commission, ``SEC Proposes Short
Sale Disclosure Rule, Order Marking Requirement, and CAT Amendments''
(Feb. 25, 2022), available at https://www.sec.gov/news/press-release/
2022-32.
\8\ See Securities and Exchange Commission, ``SEC Proposes Rules
To Prevent Fraud in Connection With Security-Based Swaps Transactions,
To Prevent Undue Influence Over CCOs and To Require Reporting of Large
Security-Based Swap Positions'' (Dec. 15, 2021), available at https://
www.sec.gov/news/press-release/2021-259.
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I will take a moment to elaborate on our work in equity markets and
private funds.
Equity Markets
With some 68 million American households investing in the equity
markets, \9\ these markets are critical to issuers and investors alike.
These markets also are experiencing rapidly changing technology. Thus,
it's appropriate that the SEC freshen up its rules to promote
efficiency and competition in the more than $40 trillion equity
markets.
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\9\ The Federal Reserve Board's 2019 Survey of Consumer Finance
finds that 53 percent of families own stock. ``Family'' as used in the
Survey is similar to ``household'' as defined in Census data. Census
data in 2019 estimated that there are 128.6 million households in the
U.S.; 53 percent of this figure is approximately 68 million households.
See Federal Reserve Board, ``Changes in U.S. Family Finances From 2016
to 2019: Evidence From the Survey of Consumer Finances'', available at
https://www.federalreserve.gov/publications/files/scf20.pdf. See also
United States Census Bureau, ``Historical Household Tables'' (Nov.
2022), available at https://www.census.gov/data/tables/time-series/
demo/families/households.html.
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Key aspects of our rules for the national market system haven't
been updated since 2005. Yet so much has changed. Not only have we seen
the electrification of markets, but also a significant share of the
markets has moved to wholesalers and other means of trading off
exchange, otherwise known as the dark markets.
First, we issued for public comment a proposal that broker-dealers
meet a Commission best execution standard--in essence, that broker-
dealers seek the best execution for investors when they buy or sell
securities. As proposed, this rule would cover all sectors of the
securities markets, including equity, fixed-income, and crypto asset
securities. \10\
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\10\ See Securities and Exchange Commission, ``SEC Proposes
Regulation Best Execution'' (Dec. 14, 2022), available at https://
www.sec.gov/news/press-release/2022-226.
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Second, we proposed updating a 23-year-old rule, known as Rule 605,
on disclosure of order execution quality. \11\
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\11\ See Securities and Exchange Commission, ``SEC Proposes
Amendments To Enhance Disclosure of Order Execution Information'' (Dec.
14, 2022), available at https://www.sec.gov/news/press-release/2022-
223.
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Third, we have a proposal to better level the playing field between
dark and lit markets. We are seeking to harmonize the minimum price
increment where stocks can be quoted and transacted as well as lower
these minimum increments across the markets. \12\
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\12\ See Securities and Exchange Commission, ``SEC Proposes Rules
To Amend Minimum Pricing Increments and Access Fee Caps and To Enhance
the Transparency of Better Priced Orders'' (Dec. 14, 2022), available
at https://www.sec.gov/news/press-release/2022-224.
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Lastly, we put out a proposal to bring greater competition for a
segment of the market related to individual investors' marketable
orders. \13\
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\13\ See Securities and Exchange Commission, ``SEC Proposes Rule
To Enhance Competition for Individual Investor Order Execution'' (Dec.
14, 2022), available at https://www.sec.gov/news/press-release/2022-
225.
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Private Funds
Last month, we finalized a rule that, among other things, will
require private fund advisers registered with the Commission to provide
detailed disclosure to investors regarding fees, expenses, and
performance. \14\ Further, the rule addressed certain sales practices,
conflicts, and compensation schemes of advisers to private funds.
Enhancing advisers' transparency and integrity promotes greater
competition and thereby efficiency in this important part of the
markets.
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\14\ See Securities and Exchange Commission, ``SEC Enhances the
Regulation of Private Fund Advisers'' (Aug. 23, 2023), available at
https://www.sec.gov/news/press-release/2023-155.
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Private funds and their advisers play a significant role for
investors and issuers. They play an important role in nearly every
sector of the capital markets. On one side are the funds' investors,
such as retirement plans or endowments. Standing behind those entities
are millions of investors like municipal workers, teachers,
firefighters, professors, students, and more. On the other side are
issuers raising capital from private funds, ranging from startups to
late-stage companies.
After the 2008 financial crisis, Congress understood the important
role that private funds and advisers play. In the Dodd-Frank Act of
2010, Congress effectively required most private fund advisers to
register with the Securities and Exchange Commission. Congress also
gave the Commission specific new authorities under the Investment
Advisers Act of 1940 to prohibit or restrict advisers' sales practices,
conflicts, and compensation schemes. \15\ This built upon our existing
authorities to regulate advisers with respect to their books and
records as well as with respect to fraudulent, deceptive, or
manipulative practices, among others. \16\
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\15\ Section 913(g)(2) of the Dodd-Frank Act added section 211(h)
to the Advisers Act.
\16\ See, e.g., Advisers Act sections 206 and 204.
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The final rule was adjusted in multiple ways based on public
feedback on the proposal. \17\
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\17\ See Gary Gensler, ``Statement on Private Fund Advisers''
(Aug. 23, 2023), available at https://www.sec.gov/news/statement/
gensler-statement-private-fund-advisers-082323.
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Integrity and Disclosure
Market integrity and disclosure help protect investors and build
trust in capital markets. Such trust helps lower the cost of capital
for issuers and enhance returns for investors. It also helps increase
participation in the capital markets. This is good for those investing
for their future and for issuers. Integrity and disclosure facilitate
what can be the best of capital markets and guard against the worst.
In this context, we have completed rules related to how insiders
trade and sell their stock; \18\ clawing back senior executives'
compensation when based on faulty financials; \19\ disclosure of
executive pay versus performance; \20\ stock buybacks; \21\ as well as
regarding fraud and manipulation in the security-based swaps market.
\22\
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\18\ See Securities and Exchange Commission, ``SEC Adopts
Amendments To Modernize Rule 10b5-1 Insider Trading Plans and Related
Disclosures'' (Dec. 14, 2022), available at https://www.sec.gov/news/
press-release/2022-222.
\19\ See Securities and Exchange Commission, ``SEC Adopts
Compensation Recovery Listing Standards and Disclosure Rules'' (Oct.
26, 2022), available at https://www.sec.gov/news/press-release/2022-
192.
\20\ See Securities and Exchange Commission, ``SEC Adopts Pay
Versus Performance Disclosure Rules'' (Aug. 22, 2022), available at
https://www.sec.gov/news/press-release/2022-149.
\21\ See Securities and Exchange Commission, ``SEC Adopts
Amendments To Modernize Share Repurchase Disclosure'' (May 3, 2023),
available at https://www.sec.gov/news/press-release/2023-85.
\22\ See Securities and Exchange Commission, ``SEC Adopts Rules
To Prevent Fraud in Connection With Security-Based Swaps Transactions
and Prevent Undue Influence Over CCOs'' (June 7, 2023), available at
https://www.sec.gov/news/press-release/2023-104.
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We also have issued proposals with regard to special purpose
acquisition companies, \23\ investment fund names, \24\ beneficial
ownership disclosure, \25\ and funds and advisers that incorporate
environmental, social, and governance factors. \26\
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\23\ See Securities and Exchange Commission, ``SEC Proposes Rules
To Enhance Disclosure and Investor Protection Relating to Special
Purpose Acquisition Companies, Shell Companies, and Projections''
(March 30, 2022), available at https://www.sec.gov/news/press-release/
2022-56.
\24\ See Securities and Exchange Commission, ``SEC Proposes Rule
Changes To Prevent Misleading or Deceptive Fund Names'' (May 25, 2022),
available at https://www.sec.gov/news/press-release/2022-91.
\25\ See Securities and Exchange Commission, ``SEC Proposes Rule
Amendments To Modernize Beneficial Ownership Reporting'' (Feb. 10,
2022), available at https://www.sec.gov/news/press-release/2022-22.
\26\ See Securities and Exchange Commission, ``SEC Proposes To
Enhance Disclosures by Certain Investment Advisers and Investment
Companies About ESG Investment Practices'' (May 25, 2022), available at
https://www.sec.gov/news/press-release/2022-92.
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In the wake of the Bernie Madoff scandal, Congress in the Dodd-
Frank Act gave the SEC updated authorities that investment advisers
should safeguard all client assets over which they have custody--not
just funds or securities. Thus, earlier this year, the Commission
proposed to expand and enhance the role of qualified custodians when
registered investment advisers custody assets on behalf of their
investors. \27\
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\27\ See Securities and Exchange Commission, ``SEC Proposes
Enhanced Safeguarding Rule for Registered Investment Advisers'' (Feb.
15, 2023), available at https://www.sec.gov/news/press-release/2023-30.
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I'm going to discuss two areas of emerging technology, predictive
data analytics and crypto, and then turn to two issuer disclosure rules
regarding climate and cyber risks.
Artificial Intelligence and Predictive Data Analytics
We live in an historic, transformational age regarding predictive
data analytics and the use of artificial intelligence. As we further
automate pattern recognition and parts of human intelligence itself,
this can create great efficiencies across the economy.
Today's predictive data analytics models also provide an increasing
ability to make predictions about each of us as individuals. Such
analytics and narrowcasting have the potential benefits of greater
financial inclusion and enhanced user experience.
This also raises the possibilities that conflicts may arise to the
extent, for example, that advisers or broker-dealers are optimizing to
place their interests ahead of their investors' interests. If a firm's
optimization function takes the interest of the firm into consideration
as well as the interest of the investor, this can lead to conflicts of
interest.
In July, we put out a proposal to require firms to analyze
conflicts of interest that may emerge when using predictive data
analytics to interact with investors. \28\ Firms would need to identify
any such conflicts that result in an investor interaction that places
the firm's interests ahead of investors' interests. Firms then would
need to eliminate or neutralize the effects of those conflicts.
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\28\ See Securities and Exchange Commission, ``SEC Proposes New
Requirements To Address Risks to Investors From Conflicts of Interest
Associated With the Use of Predictive Data Analytics by Broker-Dealers
and Investment Advisers'' (July 26, 2023), available at https://
www.sec.gov/news/press-release/2023-140.
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Crypto
There is nothing about the crypto asset securities markets that
suggests that investors and issuers are less deserving of the
protections of our securities laws.
Congress could have said in 1933 or in 1934 that the securities
laws applied only to stocks and bonds. Yet Congress included a long
list of 30-plus items in the definition of a security, including the
term ``investment contract.'' As I've previously said, without
prejudging any one token, the vast majority of crypto tokens likely
meet the investment contract test.
Given that most crypto tokens are subject to the securities laws,
it follows that most crypto intermediaries have to comply with
securities laws as well.
These laws have been on the books for decades. Sections 5, 15(a),
and 17A(b) of the Securities Exchange Act of 1934 require that
intermediaries acting as securities exchanges, brokers and dealers, and
clearing agencies are subject to the securities laws, and must register
or satisfy requirements for an exemption.
Given this industry's wide-ranging noncompliance with the
securities laws, it's not surprising that we've seen many problems in
these markets. We've seen this story before. It's reminiscent of what
we had in the 1920s before the Federal securities laws were put in
place.
Thus, we have brought a number of enforcement actions--some
settled, and some in litigation--to hold wrongdoers accountable and
promote investor protection.
The SEC also has addressed the crypto security markets through
rulemaking. We issued a reopening release that reiterated the
applicability of existing rules to platforms that trade crypto asset
securities, including so-called ``DeFi'' systems. This release also
provided supplemental information for systems that would be included in
a new, proposed exchange definition. \29\
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\29\ See Securities and Exchange Commission, ``SEC Reopens
Comment Period for Proposed Amendments to Exchange Act Rule 3b-16 and
Provides Supplemental Information'' (April 14, 2023), available at
https://www.sec.gov/news/press-release/2023-77.
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While our current investment adviser custody rule already applies
to crypto funds and securities, our proposal updating it would cover
all crypto assets and enhance the protections that qualified custodians
provide. \30\
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\30\ See Securities and Exchange Commission, ``SEC Proposes
Enhanced Safeguarding Rule for Registered Investment Advisers'' (Feb.
15, 2023), available at https://www.sec.gov/news/press-release/2023-30.
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These are just two examples of the rules we've proposed that touch
the crypto markets.
While I'm happy to discuss the SEC's work, I will not be able to
comment on any active, ongoing litigation.
Climate Risk Disclosure
The SEC has no role as to climate risk itself. We, however, do have
an important role in helping to ensure that public companies make full,
fair, and truthful disclosure about the material risks they face.
Our Federal securities laws lay out a basic bargain in our markets.
Investors get to decide which risks to take, so long as public
companies raising money from the public make what President Franklin
Roosevelt called ``complete and truthful disclosure.''
Under the securities laws, the SEC is merit neutral. Investors get
to decide what investments they make and risks they take based upon
those disclosures. The SEC focuses on the disclosures about, not the
merits of, the investment.
Already today, issuers are making climate risk disclosures, and
investors are making investment decisions based on those disclosures.
Indeed, a majority of the top thousand issuers by market cap already
make such disclosures, including what's known as Scope 1 and Scope 2
greenhouse gas emissions. \31\ Further, investors representing tens of
trillions of dollars in assets are making decisions relying on those
disclosures.
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\31\ According to the Governance and Accountability Institute, 81
percent of Russell 1000 companies published sustainability disclosures
in 2021 and 57 percent disclosed Scope 1 and 2 emissions. See
Governance and Accountability Institute ``New G&A Institute Research
Shows Sustainability Reporting by Largest U.S. Public Companies Reached
All-Time Highs in 2021'' (Nov. 16, 2022), available at https://
www.globenewswire.com/en/news-release/2022/11/16/2557344/0/en/New-G-A-
Institute-Research-Shows-Sustainability-Reporting-by-Largest-U-S-
Public-Companies-Reached-All-Time-Highs-in-2021.html. See also ``The
Enhancement and Standardization of Climate-Related Disclosures for
Investors'', Release No. 33-11042 (Mar. 21, 2022), [87 FR 21334 (Apr.
11, 2022)].
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Thus, in fulfilling the Commission's important role, we put out for
comment a proposal about climate-related disclosure to bring
consistency and comparability to such disclosures. \32\
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\32\ See Securities and Exchange Commission, ``SEC Proposes Rules
To Enhance and Standardize Climate-Related Disclosures for Investors''
(March 21, 2022), available at https://www.sec.gov/news/press-release/
2022-46.
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We are considering carefully the more than 15,000 comments we've
received on the proposal. We greatly benefit from public input and,
given the economics and the law, will consider adjustments to the
proposed rule that the staff, and ultimately the Commission, think are
appropriate in light of those comments.
Cyber Risk Disclosure
In July, we finalized rules regarding cybersecurity disclosures by
public companies. \33\ The rules will require periodic disclosures
regarding companies' risk management, strategy, and governance with
respect to cybersecurity risks. This will help investors more
effectively assess these risks and make informed investment decisions.
The rules also will require disclosure of material cybersecurity
incidents.
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\33\ See Securities and Exchange Commission, ``SEC Adopts Rules
on Cybersecurity Risk Management, Strategy, Governance, and Incident
Disclosure by Public Companies'' (July 26, 2023), available at https://
www.sec.gov/news/press-release/2023-139.
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Based upon public feedback, the final rules were changed from the
proposal in a number of ways, streamlining required disclosures for
both periodic and incident reporting. For example, the final rules will
require issuers to disclose an incident's material impacts, nature,
scope, and timing, whereas the proposal would have required additional
details, not explicitly limited by materiality.
Further, based upon public comment, the adopting release included
limited delays for disclosures of material cybersecurity incidents that
the U.S. Attorney General determines could pose a substantial risk to
national security or public safety. It provides that if the Attorney
General indicates that further delay is necessary, the Commission will
consider additional requests for delay and may grant such relief
through possible exemptive orders.
Resiliency
History is replete with times when fires in one corner of the
financial system or at one financial institution spread to the broader
economy. When this happens, the American public inevitably gets hurt.
Such fires, though too many to name, have started from both the
banking and nonbanking sectors.
The financial fires of 2008 led to more than eight million
Americans losing their jobs, millions of families losing their homes,
and small businesses across the country folding.
Promoting financial resiliency goes to the core of the SEC's three-
part mission. It's the essence of fair, orderly, and efficient markets.
In normal times, it helps promote trust in capital markets. In times of
stress, it protects investors and issuers alike.
Thus, I'm proud that the SEC has taken up a number of projects to
enhance the resiliency of our capital markets.
We already finalized a rule to shorten the settlement cycle in
securities markets in half, which lowers risk and promotes efficiency
as well as greater liquidity in the markets. \34\ We also finalized a
rule to enhance cross-market and off-exchange oversight for some of the
most active participants in the capital markets. \35\
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\34\ See Securities and Exchange Commission, ``SEC Finalizes
Rules To Reduce Risks in Clearance and Settlement'' (Feb. 15, 2023),
available at https://www.sec.gov/news/press-release/2023-29.
\35\ See Securities and Exchange Commission, ``SEC Adopts
Amendments to Exemption From National Securities Association
Membership'' (Aug. 23, 2023), available at https://www.sec.gov/news/
press-release/2023-154.
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We have proposals with regard to clearinghouse governance, risk
management, use of service providers, and recovery and wind-down plans.
\36\
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\36\ See Securities and Exchange Commission, ``SEC Proposes Rules
To Improve Clearing Agency Governance and To Mitigate Conflicts of
Interest'' (Aug. 8, 2022), available at https://www.sec.gov/news/press-
release/2022-138.
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We also have proposals related to cybersecurity and technological
resiliency in the financial sector. \37\
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\37\ See Securities and Exchange Commission, ``SEC Proposes
Cybersecurity Risk Management Rules and Amendments for Registered
Investment Advisers and Funds'' (Feb. 9, 2022), available at https://
www.sec.gov/news/press-release/2022-20. See also ``SEC Proposes New
Requirements To Address Cybersecurity Risks to the U.S. Securities
Markets'' (March 15, 2023), available at https://www.sec.gov/news/
press-release/2023-52. See also ``SEC Proposes To Expand and Update
Regulation SCI'' (March 15, 2023), available at https://www.sec.gov/
news/press-release/2023-53.
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Separately, we also put out proposals for public comment on open-
end fund liquidity. \38\
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\38\ See Securities and Exchange Commission, ``SEC Proposes
Enhancements to Open-End Fund Liquidity Framework'' (Nov. 2, 2022),
available at https://www.sec.gov/news/press-release/2022-199.
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I'd like to take a moment to elaborate on our work on Treasury
markets, money market funds, and private funds.
Treasury Markets
The $25 trillion Treasury markets \39\ are the base upon which so
much of our capital markets are built. Myriad markets and financial
products are priced off of treasuries. Treasuries are embedded in money
market funds. They are integral to monetary policy. They are how we, as
a Government and as taxpayers, raise money: We are the issuer.
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\39\ See Securities Industry and Financial Markets Association,
``U.S. Treasury Securities Statistics'' available at https://
www.sifma.org/resources/research/us-treasury-securities-statistics/.
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Though Roosevelt and Congress initially didn't give the SEC a
significant role in the Treasury markets, market events and failures at
Government securities firms in the early 1980s led Congress to give us
an important role with regard to these markets. \40\ In normal times
these markets function well, but they have had repeated moments of
instability, whether the flash crash in 2014, problems in the Treasury
funding markets in 2019, or the dash for cash in 2020. Events in the
Treasury markets this year are yet again a reminder that even the vast
Treasury markets can experience significant volatility and lessened
liquidity.
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\40\ See Gary Gensler, ``Prepared Remarks at U.S. Treasury Market
Conference'' (Nov. 17, 2021), available at https://www.sec.gov/news/
speech/gensler-us-treasury-market-conference-20211117.
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All of this is why the SEC has worked with the Department of the
Treasury, the Federal Reserve System, and other agencies to enhance the
efficiency and resiliency of the Treasury markets. \41\ These proposals
include registering and regulating Treasury dealers and platforms, as
well as facilitating greater clearing of treasuries in both cash and
funding markets. \42\
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\41\ See Gary Gensler, `` `The Beatles and the Treasury Market':
Remarks Before the U.S. Treasury Market Conference'' (Nov. 16, 2022),
available at https://www.sec.gov/news/speech/gensler-speech-treasury-
market-conference-111622.
\42\ See Securities and Exchange Commission, ``SEC Proposes Rules
To Improve Risk Management in Clearance and Settlement and To
Facilitate Additional Central Clearing for the U.S. Treasury Market''
(Sept. 14, 2022), available at https://www.sec.gov/news/press-release/
2022-162. See also ``SEC Proposes Amendments To Include Significant
Treasury Markets Platforms Within Regulation ATS'' (Jan. 26, 2022),
available at https://www.sec.gov/news/press-release/2022-10. See also
``SEC Reopens Comment Period for Proposed Amendments to Exchange Act
Rule 3b-16 and Provides Supplemental Information'' (April 14, 2023),
available at https://www.sec.gov/news/press-release/2023-77. See also
``SEC Proposes Rules To Include Certain Significant Market Participants
as `Dealers' or `Government Securities Dealers' '' (March 28, 2022),
available at https://www.sec.gov/news/press-release/2022-54.
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Money Market Funds
In July, we adopted a rule to enhance money market funds' liquidity
and investor protection. \43\ It will enhance these funds' resiliency
and ability to protect against dilution.
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\43\ See Securities and Exchange Commission, ``SEC Adopts Money
Market Fund Reforms and Amendments to Form PF Reporting Requirements
for Large Liquidity Fund Advisers'' (July 12, 2023), available at
https://www.sec.gov/news/press-release/2023-129.
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Money market funds--nearly $6 trillion in size today--provide
millions of Americans with a deposit alternative to traditional bank
accounts. Using these funds, shareholders can get market-based returns,
fully backed dollar-for-dollar by readily marketable securities.
Money market funds, though, have a potential structural liquidity
mismatch. Investors can redeem their money market fund holdings on a
daily basis, even if those funds keep some of their holdings in
securities with less liquidity.
As a result, when markets enter times of stress, some investors--
fearing dilution or illiquidity--may try to escape the bear. \44\ This
can lead to large amounts of rapid redemptions. We have observed this
play out in times of stress, including during the 2008 financial crisis
and the ``dash for cash'' in March 2020. Left unchecked, such stress
can undermine these critical funds.
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\44\ See Gary Gensler, `` `Bear in the Woods' Remarks Before the
Investment Company Institute'' (May 25, 2023), available at https://
www.sec.gov/news/speech/gensler-remarks-investment-company-institute-
05252023.
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Taking into account public comment, the final money market fund
rules, as adopted, will require liquidity fees instead of the
originally proposed swing pricing requirement. Liquidity fees, compared
with swing pricing, offer many of the same benefits and fewer of the
operational burdens.
Form PF
In response to the 2008 crisis, Congress mandated that the SEC and
the Commodity Futures Trading Commission (CFTC), working with the
member regulators of the Financial Stability Oversight Council (FSOC),
establish reporting requirements for private funds ``as necessary and
appropriate in the public interest and for the protection of investors,
or for the assessment of systemic risk.'' \45\ Thus, in 2011, along
with the CFTC, we created Form PF, an important tool the Commission
uses to oversee private fund advisers.
In the 12 years since we first adopted Form PF, private funds have
evolved significantly in their business practices, complexity, and
investment strategies. Private funds today are ever more interconnected
with our broader capital markets.
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\45\ 15 U.S.C. 80b-4(b); see also 15 U.S.C. 80b-11(e).
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Private funds nearly have tripled in size in the last decade to
approximately $26 trillion \46\ in gross assets. This compares to the
U.S. commercial banking industry of approximately $23 trillion. \47\
This makes visibility into these funds critical.
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\46\ Staff analysis of Form ADV data, inclusive of assets
attributable to securitized asset funds, as of year-end 2022.
\47\ See Board of Governors of the Federal Reserve System,
``Assets and Liabilities of Commercial Banks in the United States''
(Sept. 1, 2023), available at https://www.federalreserve.gov/releases/
h8/current/default.htm. Total assets of approximately $22.8 trillion as
of Aug. 23, 2023 (Table 2, Line 33).
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In May, we finalized a rule amending Form PF. \48\
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\48\ See Securities and Exchange Commission, ``SEC Adopts
Amendments To Enhance Private Fund Reporting'' (May 3, 2023), available
at https://www.sec.gov/news/press-release/2023-86.
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Among other things, the final rule requires, for the first time,
that large hedge fund and private equity fund advisers make current
reports on certain events to the Commission. These new, more-timely
reports--within 72 hours from large hedge fund advisers and quarterly
from private equity fund advisers--will inform financial regulators on
certain events that may indicate significant stress or otherwise signal
for systemic risk or investor harm.
These amendments will improve visibility into private funds,
helping protect investors and promote financial stability.
We also have a joint proposal with the CFTC to improve the quality
of the information we receive from all Form PF filers, with a
particular focus on large hedge fund advisers. The staffs of the SEC
and CFTC are currently reviewing comments that we received on this
proposal and are working on a potential joint recommendation for their
respective commissions.
Conclusion
Though we are blessed with the largest, most sophisticated, and
most innovative capital markets in the world, even a gold medalist must
keep training.
Technology, markets, and business models continue to change
dramatically. We now live in the age of electronic trading and
generative AI. We've had dramatic growth in the scale, size, and
interconnectedness of our capital markets, with individual investors
participating more than ever before. Further, there are other fast-
growing economies that, if they can, may seek to supplant us.
I am grateful to work alongside this remarkable staff and my fellow
Commissioners to promote the efficiency, integrity, and resiliency of
the markets.
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