Back to General Resources

SEC Oversight Hearing

House Appropriations Subcommittee on Financial Services and General Government

Securities and Exchange Commission Oversight Hearing

Wednesday, May 26, 2021

Witnesses

Opening Statements
Chairman Mike Quigley (D-Ill.)
In his opening statement, Quigley said the Securities and Exchange Commission (SEC) protects investors and promotes capital formation and that its work has changed in profound ways since the pandemic. Quigley highlighted four areas in which they hope to gain more insight: 1) the issue of emerging financial technologies and the market for cryptocurrencies which has exploded and led to extreme market volatility and pump and dump schemes; 2) new market trends that warrant scrutiny on new financial platforms; 3) SEC progress on climate issues with the widespread interest from companies and consumers in increased environmental, social and governance (ESG) disclosure; and 4) accelerated trends of digital adoptions and geographic migrations which has unfortunately increased income inequality. Quigley said it is not enough to simply make sure the markets work, but to ensure the markets work for everyone. He said he hopes to learn how to facilitate more cooperation across agencies and the federal government to help the SEC work efficiently.

Ranking Member Steve Womack (R-Ark.)
In his opening statement, Womack said it is important to build on former SEC Chairman Jay Clayton’s efforts to improve the investment experience for Main Street investors. He said the SEC has been critical in facilitating the formation of capital for companies, particularly during the recovery from the pandemic. Womack raised some concerns with cyber threats to SEC systems and market participants, and said he hopes to hear how the SEC is managing those threats. He also expressed slight concern with the SEC getting involved in climate change and political spending, saying both outside of its mission, and that instead the SEC should focus on helping the economy recover. Regarding the work of the committee, Womack said they are not able to discuss the details of SEC resource needs for next year but he pledges to work to ensure there will be an appropriate level of resources.

Testimony
Gary Gensler, Chair, Securities and Exchange Commission
In his testimony, Gensler described the activities at the SEC, noting that he has been struck by the breadth and scope of the capital markets the agency oversees: nearly $100 trillion capital markets, $50 trillion debt markets, $45 trillion public equity markets, and multi-trillion-dollar private equity and venture capital markets. Gensler said the agency’s role in these markets is to protect investors, facilitate capital formation, and ensure fair, orderly, and efficient markets. He said Congress’s support for resources at the SEC is an important part of its economic success. Gensler said the scale, scope, and complexity of capital markets has grown over the past five years as they have seen increased interest in traditional initial public offerings (IPOs) and special purpose acquisition companies (SPACs) which raise questions of who really benefits, upwards trends in private funds, and crypto assets and digital tokens. Gensler concluded that a well-funded SEC will help to better serve the American public.

Question & Answer
Cryptocurrency
Quigley asked about cryptocurrency and if the current regulatory categories are sufficient for oversight or if there is value in the creation of a new category. Gensler said there are gaps in our current system, especially around crypto exchanges and would like to work with Congress to bring investor protection to these platforms.

GameStop Market Volatility
Rep. Dave Joyce (R-Ohio) asked for some takeaways gathered so far relating to the GameStop volatility. Gensler said there are questions with the current equity market structure and if payment for order flow is allowing best execution and best interest. He said the SEC will likely make some changes around market structure.

Consolidated Audit Trail (CAT)
Rep. Matt Cartwright (D-Penn.) mentioned the CAT, which will maintain customer personally identifiable information (PII), and asked when the SEC will act to adopt the data security proposal. Gensler said he wants to protect the data but wants to work with Congress to figure out timing. Cartwright also asked how the SEC plans to address the issue of self-regulatory organizations (SROs) limiting their liability and shifting it to broker dealer firms. Gensler said he needs to look into it more and does not want put it all on the burden of the firms, adding that he believes the operator of the CAT has a responsibility as well.

SEC Jurisdiction and Resources
Quigley asked if the SEC is able to clearly split jurisdiction with other agencies like the Department of the Treasury and the Federal Trade Commission (FTC) or if there are gaps. Gensler said he has had good conversations with both agencies. He said they are working particularly with the U.S. Commodity Futures Trading Commission (CFTC) to cover the markets and protect the public investing in crypto assets. He said the Treasury is focused on anti-money laundering and guarding against illicit activity and he looks forward to supporting those efforts.

Reps. Mark Pocan (R-Wisc.) and Quigley asked what resources the SEC needs to ensure adequate oversight and if they are able to attract workers with the necessary skill level. Gensler said he has been impressed with the career staff at the agency but would like to work to get more resources and staffing, adding that a major challenge involves a lack of funding for technology.

Expanding Disclosures
Womack asked if climate information is material because of its interest to investors, if it is relevant to every investment decision, and if it could be a barrier to companies going public. Gensler said the disclosure regimes are about what a reasonable investor deems significant to their decisions and he hopes to bring consistency and reliability to those disclosures. He added that companies are at an all-time peak of trying to tap the public markets and that disclosure regimes usually always require more of public companies than private.

Rep. Chris Stewart (R-Utah) asked if there are other areas that should require more reporting other than ESG, like social justice concerns. Gensler said we should be animated by investors and there is interest to understand climate risk, but has also asked staff to make recommendations around human capital and cyber protection.

Pocan asked if it would be beneficial for investors to have access to information about private equity firms’ practices. Gensler said the private equity space has grown significantly and the transparency can be enhanced particularly between the investment manager and their investors. He said he has asked staff to understand that more and look at ways to enhance disclosure to the SEC through Form PF.

Diversity and Inclusion
Rep. Brenda Lawrence (D-Mich.) asked if the SEC has issued new rulemakings or advisory opinions on diversity and inclusion. Gensler said he has asked staff to include diversity components when looking at potential disclosure regimes for human capital.

Digital Platforms
Lawrence asked about new technologies presenting new policy questions and what the SEC can do to ensure users of applications are knowledgeable about trading and investing. Gensler said these applications brought greater access but also led to greater activity in the financial world. He said he has asked staff to put out for comment to get advice on the use of behavioral props that move people to trade more often.

Nationally Recognized Statistical Rating Organizations (NRSROs)
Rep. Norma Torres (D-Calif.) expressed concerns around the effect of consolidation and conflicts of interest in the nationally recognized statistical rating organization (NRSRO) system and asked if the SEC has examined potential impacts of NRSROs controlling access to ratings data. Gensler said they examine and oversee the credit rating agencies, but that data concentration concerns will be studied and that there will be potential suggested enhancements in the rule sets.

Torres asked if the SEC has considered measures to reduce conflicts of interest in the securities market surrounding NRSROs and end the issue-pay business model. Gensler said the SEC considered it a number of years ago but has asked staff to take a fresh look at it and see if further modifications need to be made.

For more information on this hearing, please click here.