Gary Gensler, the recently approved chair of the Securities and Exchange Commission, will have his hands full as he looks to tackle the key issues of the moment including ESG investing, cryptocurrency, order routing and a fiduciary standard for brokers.
Gensler, who previously served as chair of the Commodity Futures Trading Commission, was approved by the United States Senate on April 14 after a delay . Industry sources say he brings a reputation as an “extremely active regulator” having made it clear in his nomination hearing before the Senate Banking Committee in early March that additional disclosure requirements will be key to his approach to these pressing issues.
Kirkland & Ellis partner Norm Champ says that increased disclosure around ESG investing should be expected following the recent announcement of a Climate and ESG task force at the SEC led by Acting Deputy Director of Enforcement, Kelly Gibson. Champ expects more onerous requirements for companies to disclose how they are handling climate risk as well as diversity. While ESG investing has exploded over the past decade, there has been scrutiny over a lack of oversight of late as its popularity continues to swell.
Gensler will bring experience from his career in academia to bear, coming to the SEC from the Massachusetts Institute of Technology Sloan School of Management where he was a professor of the practice of global economics and management. He also served as co-director of a fintech group at the school as well as a senior advisor to the MIT Media Lab Digital Currency Initiative in between his two stints running financial regulators.
The financial services industry is still looking for a cohesive approach on the categorization of digital assets, which depending on the regulatory body has been considered a commodity, property, currency and a security.
While issues like ESG and cryptocurrency have been building in prominence and were certain to be top of mind for the next chair, the GameStop stock rally earlier this year fueled by Reddit thrusts issues around online brokerages and order flow onto Gensler’s docket.
He will also be the latest head of the SEC to tackle the longstanding search for a clear fiduciary standard for financial advisors and broker-dealers that has been kicked back and forth between the SEC and the Department of Labor for a decade. He will likely work on that issue with Martin Walsh, the former Mayor of Boston who was confirmed as President Joe Biden’s pick for Labor Secretary last month.
The question remains whether he will strengthen the current law of the land, Regulation Best Interest, through an increased disclosure requirement or take on the larger task of reopening the longstanding debate by taking another look at the definition of fiduciary duty.
When Gensler ran the Commodity Futures Trading Commission he was active in rulemaking, issuing more than 40 rules and only having one struck down by the courts. Many of the issues he is set to tackle were already on the radar of the SEC under Acting Chair Allison Herren Lee. The exam division featured ESG, climate risks and Reg. BI compliance in its 2021 priorities released earlier this year. Lee said the commission plans to look at order flow payments in a Feb. 25 response to a letter from Senator Elizabeth Warren.
For now there is not much worry in financial services about the new leadership at the SEC, according to Champ, who spent nearly five years at the SEC serving as director of the Division of Investment Management, deputy director of the Office of Compliance, Inspections and Examinations and the associate regional director for examinations in the regional office located in New York.
If Gensler surprised the industry by proposing the types of regulations championed by the likes of Senator Warren or others progressive lawmakers, it could cause panic, Champ admits. “People are taking a wait-and-see approach,” he says.
That being said, Champ says that he is a contrarian when it comes to the narrative that there will be some seismic shift in SEC presence between the previous and current administrations.
“Yes, the Trump administration was deregulatory but from an enforcement and examination perspective, the SEC was incredibly active over the last four years. It is really a disservice to the staff to say otherwise,” Champ adds. “This narrative that there’s going to be some big change in examination and enforcement is way overblown. There will certainly be more rules, but from the policing perspective the SEC has been pretty darn active.”
However, one area where Champ expects to see a large change from the previous regime is the reemergence of the Financial Stability Oversight Council, created in the aftermath of the financial crisis as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, in order to identify and monitor excessive risks in the U.S. financial system. Gensler was active in supporting the council in his time at the CFTC and Champ concedes that the group housed within the Department of Treasury has been “dormant” over the past few years.
His advocacy for a revival of FSOC will be aided by the Consumer Financial Protection Bureau, another agency created by Dodd-Frank that is likely to see a revival under the current administration. President Biden has nominated Rohit Chopra to the post, an acolyte of Senator Warren who helped create the bureau. The head of the CFPB, along with Gensler’s last two federal posts, chairs of the CFTC and SEC, are among the 10 voting members on FSOC.
During his confirmation process, Gensler has not indicated his preferences to lead the five largest division within the commission, the Division of Enforcement, the Division of Corporation Finance, the Office of Compliance Inspections and Examinations, the Division of Trading and Markets and the Division of Investment Management. Once he is confirmed, Champ expects names to emerge for those posts and with that more clarity about the tenor of his tenure.