Gary Gensler has his game face on

Gary Gensler is a fan of romantic comedies. In that popular movie genre, there’s usually a “meet cute” in which the lead characters get off on the wrong foot.

If the protagonists of his first two years at the helm of the SEC are Gensler on one side and the financial industry and Congress on the other, the relationship has been rocky.

“So, it starts with a bit of tension, but in the end, they find they like each other,” Gensler, chair of the Securities and Exchange Commission, said in an exclusive interview with InvestmentNews.

Nominated by President Joe Biden and sworn in to a five-year term on April 17, 2021, after being confirmed by the Senate, there’s still a long way to go before the final credits roll on Gensler’s tenure. But so far, it doesn’t look as if he and his wide range of critics will end up in each other’s arms.

Gensler leads a Democratic majority on the five-member SEC. Split votes on regulatory activities — with Gensler and fellow Democratic commissioners Caroline Crenshaw and Jaime Lizárraga on one side and Republican commissioners Hester Peirce and Mark Uyeda on the other — have become commonplace at the agency, amplifying a trend that emerged under Gensler’s Republican predecessor, Jay Clayton.

The lack of consensus could ultimately weaken final rules and make them more vulnerable to court challenges and more likely to be scrapped by a future Securities and Exchange Commission under a Republican majority.

In the meantime, Gensler is coming under withering scrutiny from congressional Republicans. In the past several weeks, he has been grilled for more than eight hours by two House committees where the GOP is in the majority.

Add to that the strong resistance many SEC proposals receive in the form of public comment letters from the financial industry, financial experts and sometimes investor advocates, and it’s clear that Gensler is getting far more “hold on” admonitions than “way to go” exhortations.

“He’s not trying to be the most popular guy. He’s trying to be the guy that does the right thing.”

Tracey Lewis, policy counsel, Public Citizen

He stays upbeat in the face of extensive opposition and doesn’t reveal whether or how the pressure might influence rulemaking.

“It’s democracy in action,” Gensler said. “It’s good to get feedback. It’s good to get public comment. It’s good to get comments from members of Congress. We’re going to keep our eye on the goal of helping investors and [stock] issuers. We’ll make adjustments where appropriate.”

He also has a large cheering section, as evidenced by comment letters backing SEC proposals on controversial issues such as climate disclosures by public companies and environmental, social and governance investing oversight.

“He’s responsive to investors,” said Tracey Lewis, policy counsel at Public Citizen. “If investors didn’t want this, he would have no support. He’s not trying to be the most popular guy. He’s trying to be the guy that does the right thing.”

Known as an aggressive regulator when he chaired the Commodity Futures Trading Commission from 2009 to 2014, Gensler has fortified that reputation at the SEC. The agency’s current agenda contains 52 rulemakings in various stages.

Many proposals are aimed at investment advisors, such as reforming outsourcing, custody and cybersecurity.

“In 26 years, this is the highest number of consequential rulemakings affecting investment advisors,” said Karen Barr, CEO of the Investment Adviser Association. “The speed and sheer volume is the most I’ve seen.”

It’s not just the number of rulemakings that are causing worry, it’s their complexity.

“They’re not making minor amendments,” Barr said. “They’re rethinking entire rules and, overall, they’re rethinking the principles-based [approach] of rules. It’s not one rule in a vacuum. It’s the cumulative impact of all these rules on investment advisors and their clients.”

AN EXPANSIVE, BUT VULNERABLE, AGENDA

The expansiveness of Gensler’s agenda has made it more vulnerable to attacks, said Jason Berkowitz, chief legal and regulatory affairs officer at the Insured Retirement Institute.

“Because the scope of his agenda is more ambitious than his predecessors, you’re seeing more pushback than previous chairs have seen,” Berkowitz said.

Gensler does his own pushing back against the notion that he’s pursuing more rules than previous chairs. He compares the 46 proposals made in his first two years with the 46 that were made by Clayton at the beginning of his tenure.

Amy Lynch, president of FrontLine Compliance, anticipates much more to come from Gensler.

“We’re only overstating [his agenda] if he stops,” Lynch said. “And why would he stop here? He has several years left in his term.”

Some industry critics say that under Gensler, the SEC isn’t clearly defining why all the rulemakings are necessary and that many of the proposals lack sufficient cost-benefit analysis.

“He is doing regulation by hypothesis,” said Eric Pan, CEO of the Investment Company Institute, which represents mutual funds. “It’s not clear [the SEC] has done their homework. They’re expecting in the comment process that others will do the analysis for them. This is not good for the markets, the SEC [or] the industry. It creates a lot of uncertainty.”

Issa Hanna, a partner at Eversheds Sutherland, said there hasn’t been an earthshaking market failure to catalyze an agenda as robust as Gensler’s.

“There’s not this era-defining singular major crisis that the Gensler administration is facing and usually the thing that would justify a massive amount of transformational change,” Hanna said.

Gensler calls the U.S. financial markets the best in the world. His motivation is to keep them at that level.

“We’ve got a role to play in driving efficiency, market integrity and market resilience,” Gensler said. “That’s how you protect investors.”

UNFAZED BY CRITICS

Republican lawmakers frequently assert that many SEC proposals exceed its congressionally approved authority. They point to a Supreme Court ruling last year that reined in the Environmental Protection Agency when warning the SEC to cool it.

Gensler isn’t rattled. He said he’s “very confident” the SEC can pursue its agenda unfettered. “Everything that we do here is grounded in law, legal authorities and how the courts interpret it,” he said.

Beyond the scope and pace of his agenda, the area of the market where Gensler is targeting much of his reform makes the industry nervous. He is focused on financial intermediaries, the people in the middle of the market whom he often describes as extracting grains of sand — money — from the neck of an hourglass as funds move between issuers and investors.

An example of this approach is the rulemaking package that includes proposals on the best execution of customer orders. It’s meant to bring greater transparency and efficiency to the process and to lower costs. Doing so threatens the so-called payment for order flow that brokerages pocket and that they say allows them to offer commission-free trading.

“It’s not at all been surprising that there are market intermediaries that say … this might change our business model; this might change our revenue model and our profitability,” Gensler said. “But our clients are the [stock] issuers and investors.”

Putting intermediaries in the regulatory cross hairs causes a neuralgic reaction from groups that represent them.

“That sounds like a solution in search of a problem,” Anya Coverman, CEO of the Institute for Portfolio Alternatives, said of Gensler’s focus on the middle. “Intermediaries are heavily regulated. We believe intermediaries play a critical role between issuers and investors.”

Retail financial advisors are intermediaries and might not be immune from Gensler’s efforts to reduce economic rent in the middle. But the advisors in the middle Gensler pointed to in the InvestmentNews interview were advisors to private equity and hedge funds.

He asserted that much of what he’s trying to accomplish would boost retail advisors. For instance, payment-for-order-flow reform “benefits their customers and, thus, benefits them as well,” Gensler said.

TACKLING AI

The SEC is also working on a proposal on digital engagement practices and the use of artificial intelligence by robo-advisors and brokerage apps to encourage certain investor behavior.

“To the extent that we can address ourselves to the possible conflicts in those predictive data analytics, I would think that helps the humans, if I can say it that way, the actual [retail] investment advisor,” Gensler said.

There may be indirect benefits for advisors from the SEC’s roster of proposals, but that doesn’t assuage concerns about Gensler’s agenda. Barr, for instance, said there is a lot of overlap between proposals that would make them difficult and costly to implement.

“They all relate to each other,” she said.

Gensler defended the rulemaking roster.

“I think each of these addresses important and separate issues,” he said.

POLITICAL DESIGNS?

Some Gensler critics accuse him of putting more emphasis on politics than sound regulation. Anthony Scaramucci, managing partner at SkyBridge Capital, an alternative investment asset manager, said Gensler is angling for a Cabinet seat and trying to build support among progressive Democrats such as Massachusetts Sen. Elizabeth Warren in the way he has approached cryptocurrency oversight and other issues.

“Unfortunately, Gary, in an effort to publicize himself and curry [political] favor, has hurt the agency,” said Scaramucci, who was briefly an official in the Trump White House. “You need a reformer. You need an open-minded regulator. [Former SEC Chair] Arthur Levitt, Gary is not. He thinks he can ride it into the Treasury Department.”

Gensler, like Scaramucci a former Goldman Sachs executive, dismissed the notion that he’s thinking ahead to his next position.

“He should get his facts right,” Gensler said. “This job is one of the highest honors that one could ever imagine. Does this look like an agenda of somebody that would be trying to do what Mooch is saying?”

Gensler’s term as head of the agency that oversees the $100 trillion U.S. capital markets with 4,547 staff members runs until 2026. It looks as if he’s settled in for the long run.

“It’s such a privilege to be in a job like this,” Gensler said. “Whatever time God, the president and the electorate give me in this job, I’m going to do everything I can to make regular working families’ and retirees’ financial lives a little better if I can.”

Later he added: “I know it sounds a little hokey.”

It would probably be difficult to find a critic of Gensler’s personal mission statement. But the agenda he’s pursuing ensures he’ll battle legions of opponents as long as he’s in office.

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