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SEC Chair Gary Gensler Testifies To Congress

On September 14, 2021, SEC Chairman Gary Gensler gave testimony to the U.S. Senate Committee on Banking, Housing and Urban Affairs highlighting the priorities of the SEC under his rule.  After giving the obligatory opening statements on the size and impact of the U.S. capital markets, Gensler broke down the SEC agenda into four topics including market structure, predictive data analytics, issuers and issuer disclosure and funds and investment management.

Market Structure

Chair Gensler began his speech market structure by talking about the U.S. Treasury Market, which I found interesting mainly because I do not recall any speech or testimony by recent SEC chairpersons that focused on the topic (albeit I haven’t read them all, but I’ve read a lot!).  During Covid, the Treasury Market suffered from liquidity issues prompting the SEC to consider rule and process changes, including those related to clearing, that could make the Treasury Markets more resilient and competitive.  The SEC is also considering Treasury trading platforms and efforts to ensure that firms that significantly trade in the market are licensed dealers with the SEC.  Likewise, the SEC is looking at updating the corporate bond and asset-backed securities markets.

Turning to equity markets, the SEC is focused on the impact of technology including the ability for retail investors to trade using commission-free apps, gamification, high-speed high-frequency trading and access to market data.  In that regard, the SEC is looking at ways to improve competition and efficiency on an order-by-order basis.  Over half of trading volume is completed by wholesalers in dark pools, and retail trading is dominated by only a few clearing firms.

Also on the SEC priority list is reducing conflicts of interest in the market, including payment for order flow, a topic that was included on in Chairman Gensler’s May 6, 2021 speech to the House Financial Services Committee (see HERE) and on the SEC Spring 2021 Regulatory Agenda (see HERE). One of the items on the agenda is reducing the current T+2 to T+1 or even T0 to reduce costs and market risks.

Security-based swaps is always a hot topic for the SEC and remains so.  Chair Gensler knows the area very well, having headed up the security-based swaps regulatory structure at the CFTC.  Some rules have already been passed and are now being implemented, including the requirement that security-based swap dealers and major participants begin registering with the SEC by November 1.  On November 8, new post-trade transparency rules will go into effect, requiring transaction data to be reported to a swap data depository and thus available to the SEC and, under appropriate circumstances, other regulators. Then, beginning on February 14, 2022, the swap data repositories will be required to disseminate data about individual transactions to the public, including the key economic terms, price, and notional value.

The Crypto Assets Market is a major focus this year (in a blog coming in the next few weeks, I will delve much deeper into this topic).  Reiterating prior comments about the Crypto Wild West, Gensler believes that the Crypto Markets are lacking investor protections and, as such, is rife with fraud, scams and abuse. The SEC is working on two tracks.  The first is to figure out how to work with other regulators to help add investor protections.  The second is to figure out legislative gaps and ask Congress to step up.

Further regulation is needed on (i) the offer and sale of crypto tokens; (ii) crypto trading and lending platforms; (iii) stable coin valuation; (iv) investment vehicles providing exposure to crypt assets or crypto derivatives; and (v) custody of crypto assets (see here for recent information on custody issues – HERE).

Building on his past experience with swaps, Chair Gensler is leading the SEC to work with the CFTC to both develop regulatory frameworks related to crypto assets. With respect to a broader set of policy frameworks, the SEC is also working with the Federal Reserve, Department of Treasury, Office of the Comptroller of the Currency, and other members of the President’s Working Group on Financial Markets on these matters.

Predictive Data Analytics

Related to market structure technology is predictive data analytics.  Artificial intelligence, predictive data analytics, and machine learning are shaping and will continue to reshape many parts of the economy.  Trading platforms have new capabilities to tailor marketing and products to individual investors. While this can increase access and choice, such differential marketing and behavioral prompts raise new questions about potential conflicts within the brokerage, wealth management, and robo-advising spaces, particularly if and when brokerage or investment advisor models are optimized for the platform’s revenue and data collection.

Gensler also expresses concern about historical biases that may be imbedded in data sets and add to discrimination against protected classes including race and gender.  Finally, there is a concern about concentration of information and interconnectedness that could increase systemic risk in the marketplace.

Issuers and Issuer Disclosure

As we all know, the disclosure rules have changed and evolved over time.  The current SEC, under Gensler, will look to expand disclosure requirements related to climate risk (see HERE), human capital (see HERE), and cybersecurity.  Cybersecurity disclosures are a hot topic at the SEC these days, with enforcement also investigating inadequate disclosures under the current rules (see HERE for more on current disclosure requirements).

The SEC is also focused on increased SPAC disclosures including related to fees and potential conflicts of interest. Although I write about SPACs often, this particular blog provides a good foundation to understand the SEC’s disclosure concerns – HERE.

Issues related to China and the ability to inspect audit records remain a primary concern (see HERE).  The SEC also feels that basic disclosures, such as the risks related to audits and what it really means to be set up with a VIE structure, are inadequate.

Finally, on the topic of disclosures, the SEC is concerned with insider trading and is looking at developing new rules on the topic.  I note that insider trading laws are largely judicially created, and the area really does need a redo.

Funds and Investment Management

Related to Funds and Investment Management, Gensler first expresses concern about the popular “green,” “sustainable,” and “low-carbon” marketing terms.  The SEC is considering ways to determine what information stands behind those claims.  Like public companies, cybersecurity risk governance in the fund markets is a high priority for the SEC.

Another priority is private fund management and disclosures.  The SEC is looking at developing additional disclosure rules including related to fees and conflicts of interest.  The private equity world, I’m sure, is not pleased with this development.

The Author

Laura Anthony, Esq.
Founding Partner
Anthony L.G., PLLC
A Corporate Law Firm

Securities attorney Laura Anthony and her experienced legal team provide ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded public companies as well as private companies going public on the Nasdaq, NYSE American or over-the-counter market, such as the OTCQB and OTCQX. For more than two decades Anthony L.G., PLLC has served clients providing fast, personalized, cutting-edge legal service.  The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker-dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions, securities token offerings and initial coin offerings, Regulation A/A+ offerings, as well as registration statements on Forms S-1, S-3, S-8 and merger registrations on Form S-4; compliance with the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers; applications to and compliance with the corporate governance requirements of securities exchanges including Nasdaq and NYSE American; general corporate; and general contract and business transactions. Ms. Anthony and her firm represent both target and acquiring companies in merger and acquisition transactions, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. The ALG legal team assists Pubcos in complying with the requirements of federal and state securities laws and SROs such as FINRA for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the small-cap and middle market’s top source for industry news, and the producer and host of LawCast.com, Corporate Finance in Focus. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.

Ms. Anthony is a member of various professional organizations including the Crowdfunding Professional Association (CfPA), Palm Beach County Bar Association, the Florida Bar Association, the American Bar Association and the ABA committees on Federal Securities Regulations and Private Equity and Venture Capital. She is a supporter of several community charities including siting on the board of directors of the American Red Cross for Palm Beach and Martin Counties, and providing financial support to the Susan Komen Foundation, Opportunity, Inc., New Hope Charities, the Society of the Four Arts, the Norton Museum of Art, Palm Beach County Zoo Society, the Kravis Center for the Performing Arts and several others. She is also a financial and hands-on supporter of Palm Beach Day Academy, one of Palm Beach’s oldest and most respected educational institutions. She currently resides in Palm Beach with her husband and daughter.

Ms. Anthony is an honors graduate from Florida State University College of Law and has been practicing law since 1993.

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