Q&A about New SEC Chair
On April 14, 2021, the Senate voted to confirm Gary Gensler as Chair of the Securities and Exchange Commission (SEC) to fill the remainder of the term vacated by his predecessor, Jay Clayton, which ends on June 5, 2021. On April 20, 2021, the Senate voted once again to confirm Gensler, this time for a full five-year term. Gensler was sworn in as SEC Chair on April 17th.
- What was Chair Gensler doing immediately before he became SEC Chair?
He was professor of the Practice of Global Economics and Management at the MIT Sloan School of Management, co-director of MIT’s Fintech@CSAIL, and senior advisor to the MIT Media Lab Digital Currency Initiative. Before that, from 2017-2019, he served as chair of the Maryland Financial Consumer Protection Commission.
- Does Chair Gensler have any past government experience?
Yes. Gensler was chair of the U.S. Commodity Futures Trading Commission from 2009 to 2014. He was a senior advisor to U.S. Senator Paul Sarbanes during the writing of the Sarbanes-Oxley Act (2002), and was undersecretary of the Treasury for Domestic Finance and assistant secretary of the Treasury from 1997-2001.
- The SEC went on a rulemaking binge over the past couple of years. Will there really be much of anything left for him or the agency to do with respect to their rules?
Actually, yes. The SEC recently reopened the comment period on its proposal to require the use of universal proxy cards – proxy cards that include the names of all duly nominated director candidates for whom proxies are solicited – in all non-exempt solicitations for contested elections. The SEC also proposed extensive amendments to its disclosure regime for mutual funds and exchange traded funds (ETFs) that it has yet to act upon. It proposed a far-reaching order exempting various categories of finders from broker-dealer regulation if they met certain conditions. It is studying issues concerning the impact of its new investment company valuation rule upon cross-trades of fixed income securities involving investment companies, now that fixed income securities are no longer viewed as securities for which market quotations are readily available. And it continues to seek information about investment adviser custody issues involving (i) trading that is not processed or settled on a delivery versus payment basis (non-DVP) and (ii) investing in digital assets.
- Speaking of digital assets, we’ve heard that Chair Gensler is an expert on digital assets and distributed ledger technology. In fact, he knows that blockchain is only one form of distributed ledger technology. What can we expect from him and the SEC with respect to digital assets?
While some observers predicted that the SEC would drop its lawsuit against Ripple asserting that XRP is an unregistered security once Chair Gensler took the helm, it did not do so. Some expect that the SEC will issue more definitive guidance on what features make a digital asset a security. The SEC will also begin to review bitcoin ETF filings. The SEC’s activity in the digital asset space is undoubtedly connected to proposals from other agencies concerning anti-money laundering protections, as well as international developments in exchange traded companies that offer retail exposure to bitcoin and other digital assets.
- Former British Prime Minister Harold Macmillan was reported to have said “events, dear boy, events” when asked by a journalist what is most likely to blow governments off course. What events will greet Chair Gensler?
Several events fall under the category of retail investor and trading issues. The GameStop short squeeze publicized several controversial market practices – from investing apps that have the look and feel of game apps, to the use of social media to manipulate the price of various securities, to the lack of disclosure of short positions taken.
Payment for order flow – particularly when coupled with commission-free trading – is another controversial issue. Some observers argue that recipients of order flow payments are failing to ensure that the orders receive best execution, and question whether existing disclosure requirements are sufficient.
The GameStop saga also revealed the technical issues involved in automated trading and app-based investing, as well as spillover effects – like restricting trading in blue chip companies with ticker symbols that resemble other less established companies, and options trading qualification issues.
The SEC may also need to deal with the fallout from the Archegos debacle. Given that Archegos was a family office, and therefore, not subject to SEC registration as an investment adviser, the SEC may revisit the scope of the family office exemption from registration.
- Any other tea leaves to read?
It’s always dangerous to read too much into appointments, but Chair Gensler’s first set of appointments may provide some clue as to what his priorities are, and what we can expect.
Significantly, he is the first SEC chairman to appoint a policy director – Heather Slavkin Corzo – who will lead a team of policy experts to advise Chair Gensler on SEC rulemakings. We believe this is important for a couple of reasons. One, an SEC rulemaking is typically drafted by the staff of the relevant division(s) with subject matter expertise, and then reviewed by, among others, the SEC chair’s counsel responsible for that subject matter. To have an entire team devoted to reviewing rulemakings may indicate that Chair Gensler will scrutinize and edit rulemakings much more extensively than did his predecessors, and he may play a more active role in setting the SEC’s rulemaking agenda presumptively than did his predecessors. Two, Ms. Corzo’s past positions as director of capital markets policy at the AFL-CIO and as head of U.S. policy at the Principles for Responsible Investment may hint at a more activist approach than that of his predecessors towards issues such as climate change, ESG and corporate political activities.
Chair Gensler has also named a Chief of Staff, a Director of the Office of Legislative and Intergovernmental Affairs and a Director of the Office of Public Affairs.
However, the individual recently appointed by the SEC to lead its Division of Enforcement abruptly resigned after less than one week. While the SEC’s press release stated only that the individual resigned for “personal reasons,” the individual’s sudden resignation comes in the wake of a federal judge’s order raising questions regarding the individual’s conduct during the course of defending a client involved in litigation.
