During a recent congressional hearing, new Securities and Exchange Commission Chairman Gary Gensler took the vast majority -- almost all -- of the questions from lawmakers over the course of the four-hour meeting.
The House Financial Services Committee convened the May 6 meeting to talk to Gensler and other regulators about the GameStop trading frenzy that occurred earlier this year and how their agencies might respond.
But the agenda soon expanded well beyond GameStop for Gensler. Given that the hearing occurred shortly after he was sworn into office, panel members took advantage of their first opportunity to grill him about their favorite issues.
The way that Gensler responded to a query about Regulation Best Interest illustrated he will be able to pursue an aggressive agenda while stepping around political landmines. As I’ve written before, regulating involves political skill, and Gensler is an able politician.
Rep. Ann Wagner, R-Mo., brought up Reg BI, the broker advice standard that prohibits them from placing their own interests ahead of those of their clients.
Conservatives like Wagner are strong proponents of Reg BI. They say it has strengthened broker advice requirements while providing enough latitude to preserve the brokerage industry’s business model and compensation methods.
But Democrats and investor advocates criticized Reg BI for being too weak to curb broker conflicts.
Wagner and other Reg BI fans are concerned that Gensler and the 3-2 Democratic SEC majority will redo Reg BI, the signature rulemaking of Gensler’s predecessor, Jay Clayton.
“It’s important that investors actually have brokers take their best interests at heart, and that’s what we’re going to do through examinations and enforcement [and] guidance to ensure that that rule is fully complied with as written,” Gensler said in answering Wagner’s question.
Wagner replied: “Applied as written, glad to hear it.”
Gensler had assured Wagner that he’s not going to blow up Reg BI. But he also sent a message to investor advocates.
“Ann Wagner and I heard his answer very differently,” said Barbara Roper, director of investor protection at the Consumer Federation of America.
Roper has been pushing Gensler to put more teeth into Reg BI by sharpening the definition of “best interest” and making more explicit how brokers should mitigate conflicts.
She said that’s what Gensler was indicating he would do.
“We’re not calling for Reg BI to be repealed at this point,” Roper said. “Additional targeted rulemaking will be needed but not a wholesale revision of the rule.”
Later in the hearing, Gensler said he’ll monitor Reg BI’s effectiveness.
“If it’s not serving the purpose of investors, then we will update and freshen that rule as well as other rules,” Gensler said. “We always have to be evaluating that investors come first.”
Gensler gave answers that were interpreted favorably by both sides of the fierce debate over raising investment advice standards. He showed he’s a savvy politician who will be able to guide the SEC’s policymaking in a direction he favors while likely minimizing Republican blowback.
Throughout the hearing, Gensler deftly handled questions about complicated issues, especially those related to GameStop, without committing the SEC to a particular course of action but making clear the agency would be tackling them.
As one lawmaker noted when Gensler avoided giving a direct answer on one of his pet issues, this is not Gensler’s first rodeo. He formerly served as the chairman of the Commodity Futures Trading Commission and is an expert on how Washington works.
“He looked very comfortable, as only a handful of people could look in their first congressional hearing as SEC chair, because he draws on such broad experience in such high positions in government,” said Kurt Wolfe, a securities lawyer.
Almost every time Gensler addressed a lawmaker, he thanked him or her for a recent call or meeting and added he looked forward to working with them.
Christopher Iacovella, president of the American Securities Association, a trade group for regional financial services companies, was an early Gensler supporter.
“He will give us a fair hearing,” Iacovella said. “We will agree with him on some things and we’ll disagree with him on others. But we know he will be very thoughtful on the policies he puts forward.”
Gensler has faced one setback so far.
His initial choice for SEC enforcement director, Alex Oh, backed out after a few days due to complications related to a two-decade-old suit against Exxon Mobil involving allegations of illegal conduct in Indonesia. Oh represents the oil company. Liberal market reform groups attacked Gensler for tapping someone who had spent too long defending corporate clients.
But Gensler can recover this fumble, and it might make him an even stronger SEC leader.
“It doesn’t have to do any lasting damage,” Roper said. “If Gary Gensler learned he can’t always rely on the unconditional support of the progressive community, that’s not a bad lesson.”
Gensler, like any good politician, will bounce back.
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