House Appropriations FSGG Committee on SEC Fiscal 2024 Budget

House Committee on Appropriations Subcommittee on Financial Services and General Government

Fiscal Year 2024 Request for the U.S. Securities and Exchange Commission

Wednesday, March 29, 2023

Topline

Chair Womack expressed concern over the SEC proposing new regulations to completely rethink our markets, the blistering pace of SEC rulemaking, and findings in the OIG report. He also highlighted the importance of addressing CAT data security and submitted a question for the record on the issue.

Ranking Member Hoyer emphasized the need for the SEC to provide opportunity for robust public input on its proposals.

Republicans highlighted the OIG report findings and questioned the Commission’s increased rulemaking activities, the explosion of data entry errors, Gensler’s ability to lead the Commission, and the impact of Gensler’s aggressive agenda on the quality of rulemaking. They also questioned the SEC’s cost benefit analysis, the volume of rulemaking’s impact on the SEC’s due diligence obligations, and the impact of short comment periods on public input.

Witnesses

The Honorable Gary Gensler, Chair, Securities and Exchange Commission (SEC)

Opening Statements

Subcommittee Chairman Steve Womack (R-Ark.)

In his opening statement, Womack said that after years of funding increases, we have an SEC that does not think twice about proposing new regulations to completely rethink our markets. He expressed concern for the blistering pace of SEC rulemaking and highlighted the SEC Office of Inspector General (OIG) finding that the SEC division offices raised concerns about increased risks and difficulties managing resources and other mission-related work because of the increase in the SEC’s rulemaking activities. He then touched on what he characterized as the outside the SEC’s expertise and constitutionally questionable activities, including requiring public companies to report on greenhouse gas emissions while claiming private enterprises won’t be impacted. Lastly, Womack highlighted the importance of data security as it pertains to the Consolidated Audit Trail (CAT), characterizing it as a top concern that should be explored thoroughly.

Subcommittee Ranking Member Steny Hoyer (D-Md.)

In his opening statement, Hoyer emphasized the need for the Commission to provide opportunity for robust public input into its proposals. Hoyer stated that now more than ever, Congress must protect the integrity of its markets and consumers to promote greater accountability in the financial sector. He noted that the U.S. economy is robust, and that the U.S. cannot achieve a robust economy without a fully funded and fully equipped SEC. Hoyer closed by noting that making cuts to the SEC and other agencies like it will only leave the U.S. economy more vulnerable to turmoil, like what transpired with the Silicon Valley Bank.

Testimony

Gary Gensler, Chair, Securities and Exchange Commission

In his testimony, Gensler discussed how the SEC is trying to ensure that the middle of the market is efficient and transparent. He noted that there has been tremendous growth in capital markets, highlighting that more people than ever are participating – trading and using tools and technologies that were unavailable even a few years ago. Gensler discussed issues in cryptocurrency market issues, but noted that as markets grow, such as crypto, SEC should also grow. He closed by supporting the proposed $2.4 billion in President Biden’s budget.

Question & Answer

SEC Process and Organizational Issues

Rep. John Moolenaar (R-Mich.) discussed the OIG report’s findings regarding the significant attrition rate, data entry issues, inability to hire those with rulemaking experience, dependency on detailees without rulemaking experience, limited time to research how rules effect other rules, and other issues. He said this raises questions about the Commission’s increased rulemaking activities, the explosion of data entry errors, and Gensler’s ability to lead the organization. He asked if the Commission’s aggressive rulemaking agenda is straining Commission staff and if quality of proposed and final rules is slipping. Gensler expressed confidence in his staff and said his rulemaking agenda is consistent with former-Chair Jay Clayton’s.

Volume of Rulemaking

Rep. Dave Joyce (R-Ohio) expressed concern that the high volume of rulemaking has prevented the SEC from fulfilling its due diligence obligations, citing the Commission’s cybersecurity disclosure proposal as not considering existing requirements established by Congress and agencies like CISA that specialize in cybersecurity. Joyce asked how the huge number of rulemakings has impacted the quality of rules and the Commission’s ability to consider public comments. Gensler said the quality of rulemaking is strong and in line with what his predecessors have done. Joyce also asked Gensler if he was concerned that so many transformative new rules, potential litigation, and swings in policy will create uncertainty. Gensler said the new rules would help investors.

Comment Periods

Rep. Ashley Hinson (R-Iowa) discussed the Commission’s short rulemaking comment periods, characterizing them as almost all 30 days in length – compared to 90–120-day comment periods for past rules – and asking why. Gensler pushed back against her characterization of the average comment period length, asserting an average of 78 days. Hinson pushed back, saying the intent behind the short periods demonstrates a transparency problem that shows the Commission wants to limit the number of viewpoints coming in. She pointed to feedback she has received from stakeholders about how little time they have to submit comments.

Hinson asked if any SEC managers have expressed concerns that, with the reduced comment time, they are having trouble getting data from stakeholders. Gensler said the Commission accepts comments and meetings past the comment period deadline. Hinson then cited the IG report to reinforce her question on the Commission’s short comment periods.

Cost Benefit Analysis

Moolenaar asked if SEC Divisions rely on data entry in their cost benefit analysis. Gensler said the Commission does cost benefit analysis in each one of its rules. Moolenaar questioned the capabilities of the Commission’s efforts, and Gensler responded by emphasizing the resources the Commission has committed to technology, including cloud computing, data security, and data analytics.

CAT/Data Security

Womack submitted a data security and CAT question for the record.

Silicon Valley Bank

Rep. Juan Ciscomani (R-Ariz.) asked if the SEC, as part of the Financial Stability Oversight Council (FSOC), identified warning signs regarding banks that have recently experienced trouble when it came to rising interest rates. Gensler said the SEC identified interest rate risk as an important risk in the financial system and within banks.

Rep. Norma Torres (D-Calif.) asked Gensler if the SEC will release a report regarding lessons learned from the Silicon Valley Bank situation and if the SEC will implement these lessons moving forward. Gensler noted that he cannot speak to specific investigations right now, and he could not speak to the case of Silicon Valley Bank.

Hoyer asked to what extent the reduction of capital requirements in 2018 had an impact on the failure of Silicon Valley Bank. Gensler deferred to the banking regulators but said he was not supportive of the law before it passed, citing his past positions.

Cryptocurrency Markets

Rep. Mark Pocan (D-Wis.) asked Gensler if the SEC has adequate resources to investigate emerging crypto currency issues. Gensler noted that the SEC is stretched thin and that while the SEC has increased their resources to address crypto markets, they could always use more.

Rep. Sanford Bishop (D-Ga.) asked Gensler about his thoughts on crypto market regulation and the SEC’s role. He further asked how Gensler is ensuring that consumers are protected from fraudulent and predatory activity. Gensler said there are regulations that already exist for cryptocurrency and that much of the market is noncompliant.

Climate Risk Disclosure

Moolenaar asked Gensler why he is spending SEC resources to determine if a company’s climate claim is valid. Gensler said the SEC is fighting misleading disclosures from companies to protect investors.

Hinson questioned how the Securities Act gives the SEC statutory authority to enact a climate rule. Gensler said the proposal is meant to standardize disclosures that companies are already making.

Rep. Michael Cloud (R-Texas) asked Gensler if he was familiar with the Supreme Court case West Virginia v. EPA and said the Commission did not have the statutory authority to promulgate its climate disclosure rule. Gensler insisted the Commission has authorization from Congress for the proposal.

Rep. Jerry Carl (R-Ala.) asked why the SEC is involved in company emissions. Gensler responded that investors are thinking about the climate risks of companies before they make investments, which is why companies already disclose their climate information. He added that the SEC’s role is to ensure disclosures are full, fair, and truthful. Gensler said Scope 3 disclosures had less support in the proposal’s comment file than Scope 1 and 2 but would not prejudge whether Scope 3 would be part of the final rule. Gensler further discussed Scope 3 in response to Hoyer’s second round on questioning.

Womack highlighted the downstream effect of climate risk disclosure requirements on public companies.

Cybersecurity

Joyce expressed concern that cybersecurity public reporting might provide a roadmap for bad actors, harming investors, and asked if Gensler was working with CISA to ensure that the SEC’s disclosures do not reveal sensitive information to cyber criminals. Gensler said the Commission has had good dialogue with CISA and emphasized the importance of disclosures for investor decisions.

Executive Compensation

Pocan discussed Section 956 of Dodd-Frank and asked if the Commission will finish its rulemaking on compensation arrangements. Gensler said yes.

Debt Ceiling

Pocan asked about raising the debt ceiling, and Gensler highlighted the impact failing to raise the debt ceiling would have on capital markets.

FINRA Arbitration

Rep. Matt Cartwright (D-Pa.) commented on FINRA arbitration and unpaid awards and asked if the SEC will push FINRA to address this issue. Gensler said he would continue to emphasize the importance of this issue in conversations with FINRA.

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