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SEC Oversight Hearing Senate Banking Committee

Senate Committee on Banking, Housing, and Urban Affairs
Oversight of the U.S. Securities and Exchange Commission
Tuesday, September 12, 2023 

Topline

  • Democrats expressed concerns regarding artificial intelligence and its involvement in capital markets.
  • Republicans asked Gensler about the authority and jurisdiction of the SEC and questioned some of the Commission’s proposals on climate change and strict regulations. 

Witnesses

  • Hon. Gary Gensler, Chair, Securities and Exchange Commission

Opening Statements
Chairman Sherrod Brown (D-Ohio)
In his opening statement, Brown said that for far too long, the markets have answered to the interests of the powerful few on Wall Street. He noted that new technologies, including artificial intelligence (AI), risk more power going to Wall Street. Brown warned that new technologies are being used to scam Americans and create an unfair playing field that favors wealthy interests over hard-working Americans. He explained that US markets are the best in the world because of strong investment protection and regulators at the SEC. Brown concluded that the SEC must ensure that investors and broker advisors must put customers first.

Ranking Member Tim Scott (R-S.C.)
In his opening statement, Scott noted that complete and timely attention is critical to ensuring that agencies remain accountable. He said that the SEC has fallen short on its obligation to be transparent and said that he is concerned with how Chair Gensler is leading the SEC. Scott said that without pro-growth regulations from the SEC, officials are limiting opportunities for Americans to take control of their own financial futures. He closed by warning Gensler that the SEC’s tax on private markets through the private funds rule will hurt small businesses and diverse fund managers.

Testimony
Hon. Gary Gensler, Chair, Securities and Exchange Commission
In his testimony, Gensler said the SEC serves investors building for a better future and issuers raising money to fund innovation, while overseeing the $100 trillion capital markets where they meet. Gensler noted that the US is blessed with one of the most innovative capital markets in the world while warning elected officials not to take this for granted. Gensler said the SEC is working to help lower costs, increase access, and promote natural stability. He closed by saying that the SEC greatly benefits from public input regarding the economics of the policies, the policies themselves, and the SEC’s legal authority.

Question & Answer
Cryptocurrency
Brown asked if it would help if crypto markets lived up to the investor protections in the markets. Gensler said if they did it would help investors but noted that misconduct and fraud exists in the field.

 Sen. Bill Hagerty (R-Tenn.) noted that there was recently a court ruling that the SEC’s denial of Grayscale bitcoin was mathematically indistinguishable. He asked Gensler to explain what the SEC needs to see in a filing to approve the spot bitcoin electronically traded fund (ETF) and what questions still need answers about the market. Gensler said that the SEC is still reviewing the court decision and noted that the SEC has multiple filings around bitcoin ETFs.

Sen. Cynthia Lummis (R-Wyo.) asked Gensler if placing custody assets on the company’s balance sheet results in consumer assets being seized by creditors in the event of a bankruptcy. Gensler said that with the current laws in the US, the SEC cannot segregate crypto assets as easily as other assets.

Private Equity & Investors
Sen. Elizabeth Warren (D-Mass.) asked Gensler how to explain to the American people that the SEC is standing by while private equity and the companies they own scoop up investor money without any public verification. Gensler reassured Warren that the rule the SEC just finished has an annual audit for private funds.

Brown asked what steps the SEC is taking to make sure that investors have the information they need to make informed choices. Gensler said that investors get the basic bargain, and they must have complete information. He also noted that the SEC needs to ensure that all companies share information, so investors understand what they are investing in.

Brown asked how providing information about fees and performance will help pension funds and other investors. Gensler said the SEC proposed and finalized rules based on public comment to bring greater transparency about the fees and performance of private fund advisors.

Scott asked Gensler if he would rescind his proposal to create unfair advantages for large investors. Gensler said to ensure that in times of stress that the pricing matches up when somebody redeems from a mutual fund, officials need to also ensure that the remaining shareholders in the mutual fund are not bearing any costs.

Sen. Chris Van Hollen (D-Md.) asked Gensler to expand on the need for more transparency of foreign investments in private equity funds. Gensler said that the Treasury Department has more say in issues regarding foreign investments.

Sen. Jack Reed (D-R.I.) asked if companies with private equity funds should report to the SEC as others do. Gensler said that that decision is to be made by Congress.

Artificial Intelligence
Sen. Bob Menendez (D-N.J.) asked Gensler to describe how the financial sector is deploying AI and about some of the potential risks of its use in capital markets. Gensler said that AI is being used in capital markets to analyze market decisions and help with the documentation and compliance of actors, but that there are some concerns it could lead to conflicts in the market. Gensler noted that the SEC has proposed something to address these concerns.

Sen. Mike Rounds (R-S.D.) asked if the SEC’s proposed rule was intended for all computational tools or just AI and machine learning. Gensler said that the rule is technology neutral.

Sen. Catherine Cortez Masto (D-Nev.) asked if trading house and money managers should be required to disclose their use of AI in other areas. Gensler reminded the Committee that AI is an emerging technology and that the SEC is asking actors to let them know what technologies they’re using. He noted that there are new challenges with AI, including the lack of explanations, the chance for biases and how it’s used. He said this might be something that Congress will want to take up, noting the SEC is technology neutral.

Sen. Mark Warner (D-Va.) asked Gensler how to ensure trust in public markets is not undermined by the rise of AI. Gensler said that the use of AI is a real risk to the market. He emphasized that the US has good laws, but these new technologies will challenge those.

 

For more information on this meeting, please click here.
For an archive of past SIFMA hearing coverage, please click here.