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Senate Appropriations Hearing: A Review of the Fiscal Year 2024 Budget for the US Securities and Exchange Commission

Senate Committee on Appropriations

Subcommittee on Financial Services and General Government

A Review of the Fiscal Year 2024 Budget for the US Securities and Exchange Commission

Wednesday, July 19, 2023

 

Topline

  • Democrats expressed concerns regarding crypto and insider trading disclosure rules.
  • Republicans asked about proxy firms and the need for increased transparency.

 

Witnesses

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

Opening Statements

Subcommittee Chairman Chris Van Hollen (D-Md.)

In his opening statement, Van Hollen voiced his approval of Chair Gensler and noted that he has led the SEC with transparency and adapted to change. He said that hope that Chinese firms trading on US exchanges are held to the same insider trading disclosure rules as US companies. He closed by noting the SEC has responded to changing market conditions which are only becoming more complex.

 

Subcommittee Ranking Member Bill Hagerty (R-Tenn.)

In his opening statement, Hagerty noted that Congress needs to fund the work that the SEC does, but expressed his concern that the SEC spends dollars on initiatives that are not within their authority, including the Commission’s climate change proposal. Hagerty also spoke about proxy firms, calling for increased transparency. He concluded that proxy firms make the US financial system weaker.

 

Testimony

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

In his testimony, Gensler explained that while the approved FY24 level of funding will allow the SEC to continue their work, it’s still significantly less than the amount the Commission requested. He added that the lack of funding will prevent the SEC from hiring additional staff. Gensler also said the lack of funding also means that the SEC will not be able to invest in newer technology to help the American public. He briefly spoke on crypto, noting the growth and rapid change in crypto presents an increased possibility for wrongdoing. He concluded by saying the SEC’s budget request would give the Commission better resources to protect the American public.

 

Question & Answer

Cryptocurrency

Van Hollen asked Gensler about fundamental issues regarding crypto and the jurisdiction of the SEC. Gensler said the SEC doesn’t know how many crypto tokens are valid under the US securities laws.

Sen. Richard Durbin (D-Ill.) asked Gensler if the crypto market is filled with fraud. Gensler said there is fraud present, but not necessarily from all actors.

Durbin asked about the best way for Congress to protect Americans from crypto. Gensler said the CFTC needs more authority from Congress to fight bad actors.

Sen. John Kennedy (R-La.) asked Gensler why the SEC allowed FTX to happen. Gensler said that, like most cases in crypto, companies bundle items together that are offshore and unclear. He also noted that it takes 23 months total for an SEC investigation that is thorough.

Technology

Van Hollen asked Gensler where he sees the SEC’s budget capacity concerning emerging technologies like AI. Gensler said the SEC can always use more funding in the technology realm. He also said that AI and other emerging technologies are some of the most transformative technologies of this decade.

Sen. Chris Coons (D-Del.) asked Gensler where he thinks the SEC needs to prioritize investment. Gensler said the SEC needs to prioritize investments in staffing and advanced technology.

 

ESG

Sen. Joe Manchin (D-WV) spoke about his concerns with Scope III emissions and asked Chair Gensler for any thoughts he may have on it. Chair Gensler responded by saying that the SEC is a disclosure-based agency, and that the SEC seeks to provide a consistent basis for firms to disclose emissions and other climate information. Gensler also emphasized that the SEC is listening to concerns about smaller and non-public firms being subject to these disclosures.

 

SEC Regulatory Agenda

Manchin asked about the SEC’s regulatory agenda, saying that the SEC had proposed twice the number of rules of Gensler’s predecessors. Gensler commented that Chair Clayton had produced 64 rule proposals over his four years, while Gensler’s docket only had 55 proposed rules with some more to be added.

Sen. Bill Haggerty (R-Tn.) said that Chair Gensler proposed 58 rules during his first 27 months, nearly double that of his predecessors. Haggerty went on to ask whether the SEC’s more aggressive agenda, which SEC managerial staff raised issues about, suppressed the Commissions ability to produce good rules. Gensler said that he is proud to work with his staff, and that he and the SEC had been candid about their docket and adjust final rules with comments in mind.

Coons spoke to a letter that he wrote that urged the SEC to allow for more time for comment periods and said that he and his colleagues never received an answer. Gensler responded by saying that between re-openings which provide additional information and the original comment periods, the SEC does provide sufficient time.

 

SEC Proposed Rules

Coons asked how many funds had utilized swing pricing since it was introduced in 2016. Gensler responded that very few did.

Sen. John Boozman (R-Ar.) said he had concerns with the SEC’s custody proposal as it would add additional burden on institutions and qualified custodians. It would also upend derivatives, commodities, and treasury markets. Boozman went on to say that he urges the SEC to withdraw the proposal or rework it entirely. He also expressed disappointment that there was little coordination with the treasury or CFTC. Gensler responded that this rule was brought about to respond to the Bernie Madoff crisis from a decade ago. Gensler said that he is completing the work from Dodd-Frank and that the SEC is listening to comments and will adjust accordingly.

Boozman warned of a credit crunch as lenders were using single name CDS to hedge against credit drawdowns but referenced concerns around SEC rule proposal 10b-1 hurting liquidity and credit pull backs. He went on to say SEC proposals like treasury market reform, applying rule 15c2-11 to fixed income, the dealer proposal, and rule 10b-1 could reduce access to credit.

Boozman asked Gensler if he would commit to working with the Fed to find the cumulative economic impact of Gensler’s many proposals on the U.S. credit market. Gensler said the SEC conducts vast amounts of economic research and that he would work with the Fed as he does. Gensler said the SEC conducts vast amounts of economic research and that he has close contact with the treasury and the Fed on these issues. Boozman went on to say that the Inspector General’s report showed that staff felt rushed in their work at the SEC and that Gensler would need to sort that out.

Van Hollen asked Gensler what he thought about the attempt to stop proxy advisers from being hired. Gensler said that ultimately the firm hiring proxy advisers has a fiduciary duty to their investors, and that firms often hire outside advisers for a variety of services including proxy advisory.

Hagerty said that his issue with proxy advisers lies with disclosures and activist investors. He went on to say shareholder proposals are too easy to propose and that they inundate firms, while generating business for activist investors.

 

For more information on this meeting, please click here.

For an archive of past SIFMA hearing coverage, please click here.