SEC Chair Gensler fires back at GOP critics

Republican senators blasted a range of SEC rule proposals Tuesday — from mutual fund reform to a measure targeting advisor and broker conflicts when using artificial intelligence — while the agency’s leader assured them he is listening to critics.

During a Securities and Exchange Commission oversight hearing before the Senate Banking Committee, Chair Gary Gensler said the SEC has promulgated 22 final rules so far in his tenure, which began in April 2021. He said most were modified during the rulemaking process in response to comment letters.

“Nearly all of them have changed based on public feedback,” Gensler said.

That feedback is often like the grilling he received over the two hours of the banking panel hearing. GOP members of the committee — and some Democrats — zeroed in on what they don’t like about the dozens of proposals that remain on the SEC agenda.

Sen. Tim Scott, R-S.C., and the highest-ranking Republican on the committee, asserted that the SEC was exceeding its authority with a proposal to address advisor and broker conflicts of interest when using predictive data analytics — or artificial intelligence.

“Despite it being labeled a rule on artificial intelligence, your power grab to regulate emerging technologies, even Excel spreadsheets, is beyond the SEC’s scope and will ultimately stifle innovation,” said Scott, a Republican presidential candidate.

Sen. Mike Rounds, R-S.D., charged that the AI proposal demonstrated a “hostile” attitude toward innovation.

The lawmakers’ criticisms echoed those in a Tuesday letter to the SEC from 14 financial industry trade associations. The groups wrote that the SEC’s AI proposal “illustrates the Commission’s continued war on technology” and is “outright hostile to the use of technology.”

The letter was signed by the Institute for Portfolio Alternatives, the American Securities Association, the Investment Company Institute, the Financial Services Institute, the Insured Retirement Institute, the American Council of Life Insurers, the American Investment Council and the National Society of Compliance Professionals, among others.

Gensler said the SEC is trying to prevent robo-advisors, brokerage apps and other advisors from using AI algorithms to put their financial interests ahead of their customers’ interests.  

“This proposal was to get public feedback on how to neutralize those conflicts,” Gensler told lawmakers.

Sen. Cynthia Lummis, R-Wyo., asked Gensler if he would re-propose the rule in the face of criticism.

“We commit to taking public comments seriously,” Gensler said.

Another proposal that has drawn widespread resistance from the financial industry and some consumer groups is one that would reform mutual fund operations, including swing pricing and a so-called hard close to daily trading to ensure that fund investors who remain during times of high redemption don’t have their shares diluted.

Gensler was challenged on the rule by Scott, a former financial advisor who said the changes would hurt retirement investors, as well as Sen. Steve Daines, R-Mt., who pointed to the opposition to swing pricing and the hard close.

“We’re taking a very close look at … whether to make adjustments,” Gensler said. “As we go along, I can’t pre-commit whether we’ll finalize or not.”

Gensler received support from committee Democrats, who pushed him to finalize a rule on climate disclosure for public companies and propose one for disclosure of human capital metrics.

“We've heard all the complaints, and I’m sure we’ll hear them again today — too many rules, too fast, too hard to comply with,” said Sen. Sherrod Brown, D-Ohio and committee chairman. “But America’s markets are the greatest in the world because we have strong investor protections — and because we have effective regulators who work to make sure we have transparent, fair and honest markets that Americans deserve."

Republicans pummeled Gensler, who was appointed by President Biden and leads a 3-2 Democratic majority on the SEC, for the scope and speed of the agency’s regulatory agenda.

“The breakneck pace [at which] you are pumping out regulations should not be applauded,” Scott said. “The regulations the SEC has proposed under your leadership are unjustified and are sowing discord and confusion for industry and market participants alike.”

The SEC has 47 proposals on its agenda. The 22 that have gone final in his 2½ years are less than the number of final rules promulgated by his three successors as chair, Gensler said, citing a study by Bloomberg Law.

“We’re updating our rules to promote efficiency, integrity and resilience in the market,” he said. “We do so with an eye towards investors and issuers alike to ensure that the markets work for them rather than the investors working for the market intermediaries. We’re working to lower costs, increase access and promote financial stability.”