Gary Gensler reflects on his first year as SEC chair
By Ephrat Livni
Almost exactly one year ago, Gary Gensler was confirmed as chair of the Securities and Exchange Commission. The Senate approved him in a 53-45 vote, with nearly all Republicans opposing Gensler, a former Goldman Sachs executive and veteran of the Clinton and Obama administrations who had voiced support for tougher reporting rules for public companies.
Since then, Gensler has roused the ire of retail stock traders and crypto enthusiasts as he has raised alarms over market developments such as the gamification of trading and the proliferation of unregistered cryptocurrency tokens. He is also under fire from a variety of industries for what they say is overreach on issues such as proposed climate disclosure rules and scrutiny of shell companies and for the sheer amount of agency activity overall on his watch.
As the nation’s top markets regulator, Gensler was always going to be busy. But he was nominated during the unexpected trading frenzy in so-called meme stocks such as GameStop and AMC Entertainment, which was driven in part by commission-free trading apps. He was confirmed for a five-year term on the day the crypto exchange Coinbase went public, a sign that the once-fringe industry was rapidly moving into the mainstream.
“No one could be really prepared for a job like this,” Gensler, 64, told DealBook in an interview this past week. That said, he took over the SEC after 18 years in banking and had served at the Treasury Department, led the Commodity Futures Trading Commission, helped produce financial legislation for the Senate and got to know every SEC chair before him since the 1993 appointment of Arthur Levitt. (He still keeps in touch with them, Gensler said.)
“A year in, there are times that I still pinch myself and think, ‘Wow, I’ve been asked to do this job,’” Gensler said, reflecting on what he has accomplished so far and explaining his regulatory agenda for the years ahead.
New Actions for a New Era in Investing
Predictive data analytics have changed how investors make decisions, Gensler said. For an example, he pointed to sentiment analysis, which big investment funds use to analyze the voice and behavior of CEOs in earnings calls to assess their feelings.
“Most S&P 500 companies, when they have their investor calls, there’s a computer also listening in,” Gensler said. “I think it’s pretty transformational.
“We’ve lived through a rapid electronification — the digitalization, if you wish — of capital markets. What I’m talking about is machine learning and artificial intelligence.”
Gensler has directed the SEC to study these kinds of developments.
In October, the agency published a 45-page report on the meme stock frenzy and examined how changes in tools were reshaping markets. The historic episode in 2021 was driven by retail traders using brokerage apps who banded together on social media to undermine big short sellers betting against companies such as GameStop and AMC.
The report examined gamification, or what Gensler calls “digital engagement” — how apps can manipulate trading behavior through design features. (Last year, for example, one such app, Robinhood, discontinued animated confetti, a feature that helped gamify investing.) Although the report did not propose new rules, it did suggest that they might be needed in the gamification-of-trading era. The agency put out a request for public comment and is considering next steps.
Gensler has also asked the SEC staff to study market structure.
Improvements are imperative if the United States hopes to maintain global leadership, he said. “I think about how we at the agency update our rules ensuring that we remain the most efficient capital market in light of the technologies that are rapidly changing, and I think it’s also a geopolitical piece to it, too,” he said.
Sweeping Changes to Climate Reporting
Companies have long reported climate-related information demanded by investors, although no mandatory standards existed. Without the standardization, Gensler said, investors have a hard time making meaningful comparisons and assessing progress.
New rules proposed last month could address that gap, he said.
In March, the SEC gave initial approval to corporate disclosure rules on climate risks. Gensler points out that they are based on the input of investors, issuers and some academic experts, not government bureaucrats.
“Many companies are saying, ‘We plan to have less greenhouse gas emissions in the future by 2040 or 2050,’ or something,” Gensler said. “And, yes, today, companies are making disclosures, and investors are making decisions based on those disclosures, so we have the same role we’ve had for 90 years to help bring some efficiency to all of this. In this case, some consistency and comparability.”
Some Republicans disagree, including Sen. Patrick Toomey of Pennsylvania, the party’s ranking member on the Banking Committee, and Rep. Patrick McHenry of North Carolina, the ranking member on the Committee on Financial Services. The new rules would simply push progressive climate policy, they contend, adding that the information the SEC wants disclosed is not “material,” referring to a standard that the Supreme Court first articulated in the 1970s.
Gensler has that materiality standard memorized, reciting, “What is the substantial likelihood that a reasonable investor would find it significant in a total mix of information?”
There is nothing new about what the agency is doing, he argues, noting that risk disclosures were adopted in the 1960s, that demand for environmental data began in the 1970s and that almost every decade since has brought additional concerns.
“Markets adapt and adjust to new risks,” Gensler said. “And so that which is material to investors can shift.”
Climate and cybersecurity risks have become material, he believes, “because when you buy or sell a stock, it’s not just about last year’s earnings; it’s about the future.”
Leveling the Playing Field Between SPACs and Traditional IPOs
With all the other enthusiasm in the frothy pandemic market of 2021, special purpose acquisition companies, or SPACs, also known as blank-check firms, have become a big thing. SPACs are public shell companies created to acquire a target company without the same procedural hassles as a traditional initial public offering, or IPO, and they became so popular last year that regulators grew alarmed.
“If it quacks like a duck and SPACs like a duck, then regulate it like a duck,” Gensler joked.
His agency recently proposed additional disclosures and other potential mandates around SPACs to ensure that investors understand the risks and to create a level playing field between them and IPOs.
Do the Old Rules Apply to Cryptocurrency?
Gensler’s recurring theme, fairness through information parity — the story he is sticking to — is a principle that he believes applies to everything, including cryptocurrency.
Despite his fascination with technology, or perhaps because of it, Gensler does not consider cryptocurrency quite as innovative as its proponents claim, and he thinks many of the old rules suffice to regulate the industry.
These trading platforms are not that different from the New York Stock Exchange and Nasdaq, Gensler said, “in that millions of people are meeting and buying and selling something that is most likely a security.”
“These crypto tokens are crypto security tokens because entrepreneurs are raising money from the public,” he added.
“This is what FDR and Congress addressed some 90 years ago,” he insisted. “You want to raise money from the public and the public wants to take risk, that’s fine, as long as you register with the SEC and you give them full and fair disclosure and don’t lie to them.”