Gary Gensler Nominated To Lead The SEC. What Does That Mean For You?
Bernie Sanders wasn’t having it.
Just a few months into President Barack Obama’s first term, the junior senator from Vermont appeared on the left-wing television news show Democracy Now to voice his displeasure with Obama’s pick to run the Commodity Futures Trading Commission (CFTC).
“I don’t believe that we need more of the same old same old,” Sen. Sanders told Democracy Now host Amy Goodman. “The philosophy that [Gary] Gensler espoused when he was working for Bill Clinton in the Treasury Department was strongly deregulation.”
Two months later, Sanders and a few other liberal Democratic senators voted against Gensler’s nomination. It hardly mattered: Gensler cruised to an easy confirmation.
What a difference 12 years makes. President Joe Biden has tapped Gensler to run the Securities and Exchange Commission (SEC), and neither Sanders nor anyone from the left flank of the Democratic party has made much guff. When the Senate Banking Committee advanced Gensler’s nomination on March 10, left-wing stalwarts including Senators Elizabeth Warren (D-MA) and Sherrod Brown (D-OH) gave Ginsler the thumbs-up.
Why the switch? One reason is that Sanders’s particular concerns were proved wrong after Gensler used his position leading the CFTC to go after the banks as aggressively as anyone in the Obama administration.
From Goldman Partner to Goldman Persecutor
Back in 2009, Sanders had his dander up because Gensler’s background suggested that he might go easy on regulating the derivatives market, which played a key role in the economic meltdown of the Great Recession.
After all, Gensler had been a high-ranking Treasury official in a Clinton administration, which ushered in an era of financial deregulation. Before that, he spent nearly two decades as a partner at Goldman Sachs.
Recall that at the time of Gensler’s 2009 nomination, Goldman Sachs was accused of engaging in “serious misconduct in falsely assuring investors that securities it sold were backed by sound mortgages, when it knew that they were full of mortgages that were likely to fail,” according to the Justice Department. Goldman ultimately paid a $5 billion fine.
Much to the surprise of his detractors, Gensler would prove to be a hard-charging regulator as the nation slowly recovered from the housing crisis.
He pushed Congress to implement more transparency and stricter rules for the derivatives market, which was a big section of the Dodd-Frank banking reform bill. Later on he helped lead the charge against Libor, the lending benchmark that was manipulated by bankers between 2005 and 2009.
“After a year on the job, Gensler is still getting flak, but not from the usual suspects,” according to a June 2010 story in Institutional Investor. “The banker-turned-regulator has won over most of his congressional skeptics with his strong advocacy of tighter regulation.”
The Big Issues Facing the SEC Today
The SEC is the primary federal regulatory agency tasked with protecting investors, policing the securities markets and facilitating capital formation. Basically that boils down to making sure shareholders aren’t ripped off, markets work without drama and companies are able to raise cash from investors.
Here are a few of the higher-profile issues that Gensler, if his candidacy is approved, would focus on at the SEC over coming years:
The Meme Stock Experience
During his confirmation hearings, Gensler addressed the recent explosion in popularity of day trading on apps like Robinhood, exemplified by the recent GameStop kerfuffle. The SEC will be the agency looking to contain the potential damage this trend might cause investors.
“I think technology has provided greater access but also raises interesting questions,” Gensler said at the Senate hearings. “What does it mean when balloons and confetti are dropping and you have behavioral prompts to get investors to do more transactions on what appears to be a free trading app, but there’s also this payment behind the scenes?”
This behind-the-scenes bit refers to a practice known as payment for order flow, a controversial but legal practice whereby a brokerage like Robinhood auctions off its clients market orders to high-frequency traders. It’s a great source of revenue for a start-up like Robinhood, but it’s bad for users as the “winner” who gets to fill an order might not always fetch an investor the best possible price.
Gensler’s SEC will be taking a hard look at some of Robinhood’s more aggressive tactics to induce trading activity. In addition, it will also likely go after online chat rooms, like the notorious WallStreetBets Reddit forum, in an effort to police the meme stock hype.
Another point of contention during Gensler’s Senate grilling centered on a proposal by Nasdaq, the tech-focused stock exchange, that would mandate that each of the thousands of companies that lists on it to have a board of directors that is not composed exclusively of white heterosexual men.
The move would require at least one board position to be filled by a woman and another to be helmed by someone who is a racial minority or who identifes as gay, lesbian, bisexual, transgender or queer. Three-quarters of the companies on the exchange would currently fail to meet this standard and could potentially be delisted. If a company doesn’t have a sufficiently diverse boardroom, it would have to explain itself to Nasdaq.
When senators asked Gensler if the SEC should require companies to disclose information on workforce diversity, he was pretty vague on the issue. “I think human capital is a very important part of the value proposition in so many companies,” Gensler said.
Environmental, Social and Governance Issues
Along with boardroom diversity, Gensler’s SEC is expected to push businesses to disclose more information regarding environmental, social and governance (ESG) issues. How much, and what type of information, will be required to be disclosed is up for debate.
The key is that investors should have enough information to make informed decisions about their money. In his testimony, Gensler noted that Americans are ever more interested in these issues and want more information. He believes the SEC “has a role to play” to ensure ESG disclosures are consistent so the investing public can easily make comparisons.
A Gensler-SEC “will likely enact rules that make climate-change disclosures mandatory,” according to commentary by law firm Jones Day.
Back when Gensler led the CFTC, cryptocurrency was a techie sideshow that most of mainstream finance kept at arm’s length. Today a single Bitcoin is worth more than $55,000, and some of the biggest companies in the world, including Tesla and Fidelity, have gotten in on the action.
After he left the Obama White House, Gensler taught at MIT’s Sloan School of Management, focusing on issues like cryptocurrencies and governmental policy. While at MIT, Gensler warned that virtual currency projects—like Facebook’s Diem, formerly known as Libra—would face an eventual reckoning with regulators.
“Markets—and technology—are always changing,” Gensler said in his opening remarks. “Our rules have to change along with them. In my current role as a professor at MIT, I research and teach on the intersection of technology and finance. I believe financial technology can be a powerful force for good—but only if we continue to harness the core values of the SEC in service of investors, issuers and the public.”
Back in late 2019, Gensler wrote an article for Coindesk examining the potential for cryptocurrencies to be “change agents” that could shake up the world of finance. As in other forums, he was even-handed in examining the costs and benefits of virtual currencies like Bitcoin.
“Though literally thousands of projects have yet to land on broadly adopted use cases, I remain intrigued by Satoshi’s innovation’s potential to spur change—either directly or indirectly as a catalyst,” he wrote. What his SEC leadership could mean for the future of crypto remains to be seen, but it’s clear that Gensler is no Luddite.
Regulation Best Interest
For a decade, federal and state regulators have been discussing the best way to insure financial advisors always have their clients’ best interests in mind when they offer them investing advice. Some advisors are already bound by fiduciary duty, but other classes of advisors are held to a lower standard and earn commissions from big financial firms to recommend certain products.
The SEC has taken multiple stabs at the so-called best interest standard, under both the Obama and Trump administrations, and it adopted a compromise best interest regulation in 2019. Gensler could buttress the new standard through a more robust definition or via enforcement actions.
What the SEC Means for Your Investments
You might hear about the SEC from time to time in the news—or maybe you’ve come across the three-letter acronym as a plotline in the show “Billions.” But for the most part, Gary Gensler won’t occupy space in your daily life, just as you likely had no idea that the SEC was run by someone named Jay Clayton during the Trump administration or by Mary Jo White before that.
In fact, if you have a well-diversified portfolio of stocks and bonds that matches your investing timeline and risk tolerance you don’t have to pay attention to any of the machinations in Washington at all. That’s just another small reward for investing your money well.