On May 6, 2021, SEC Chair Gary Gensler participated in his first Congressional hearing, before the House Committee on Financial Services, joined by Robert Cook, President and CEO of FINRA and Michael C. Bodson, the CEO of The Depository Trust & Clearing Corporation. This was the third hearing for the House Financial Services Committee on issues related to the January 2021 market events associated with trading in GameStop; however, Committee members did not limit themselves to the topic at hand.

On the “headline” issue of the so-called gamification of trading apps, each speaker hewed closely to his prepared testimony (Gensler, Cook, Bodson).  Topics on these issues, which also were discussed at the hearing, included: conflicts of interest presented by payment for order flow; market structure, including concentration of retail order volume; short selling and market transparency; the impact of social media on trading; and clearance and settlement, including when trading restrictions are appropriate. Both Chair Gensler and Mr. Cook noted that the SEC report will issue a report this summer on the January market events, and that public comment will be sought on any related regulations. Both Chair Gensler and Mr. Cook talked about how trading apps alter the relationship between trader and trading firm, removing the human intermediation that had provided for better checks on qualifications for margin or options accounts, for example. Going forward, they agreed, the challenge will be striking the right balance and considering whether new technologies require new rules. While it seems that shortening the settlement cycle is a foregone conclusion, much of the rest is up for further inquiry.

Digital Assets: Chair Gensler was asked multiple times about cryptocurrency, to which he responded that “greater investor protection” and regulatory leadership is needed.  He noted that the SEC would continue to exercise its jurisdiction in this area, as it relates to securities; for example, the agency would complete its work offering guidance on the custody of digital assets. Chair Gensler specifically noted that Congressional assistance is required in offering investor protection in the area of cryptocurrency exchanges and strongly encouraged that action.

Regulation Best Interest: Broker-dealers likely breathed a sigh of relief when Chair Gensler responded to questions about Reg BI by advising that he expected it to be applied as written through examinations and enforcement, though he was clear about the import of the regulation.

ESG Activities: The Commission’s recent activity in the ESG space was raised often, with questioners particularly voicing concerns about “regulation by enforcement,” given the recent establishment of an Enforcement Division task force. Chair Gensler supported the recent SEC activity, repeatedly stating that investors need “consistency and comparability” in disclosures to make educated investment decisions. He also noted the currently open comment period for raising concerns and offering suggestions on contemplated revisions to the 2010 Climate Change Guidance and additional ESG regulation of public company disclosure.  In his responses, Chair Gensler did not seem tied to the concept of financial materiality, referring generally to the definition of materiality found in legal precedent, which is what a reasonable investor would want to know in making an investment decision.  Chair Gensler was clear that enforcement actions will focus on disclosure as evaluated under existing legal requirements.

Finally, in response to numerous questions, the new SEC Chairman deferred, noting repeatedly that he’d been in the job for only three weeks, but the real news of the day is that, apparently, he’s a “rom-com guy.”

Author

Amy serves as the Co-Chair of Baker McKenzie's North America Financial Regulation & Enforcement Practice, which provides clients with a full range of regulatory advice and enforcement counseling. Amy also serves on the steering committees of the Firm's Global Financial Services Regulatory and Global Financial Institutions Groups.