Securities and Exchange Commission (SEC) Chairman Gary Gensler’s lengthy to-do list for regulating U.S. financial markets has Wall Street anxiously awaiting his first moves.
The SEC’s top official took office this week amid a yearlong financial market frenzy and a flood of novel investment products with unknown implications for the broader investment industry.
The rise of popular online trading applications have drawn tens of thousands of new investors into the market with easy access to stocks, digital currencies, exchange traded funds and options.
A flood of federal stimulus and the increasingly viral nature of investing — epitomized by the GameStop short squeeze and a publicly traded New Jersey deli with less than $14,000 in annual sales — have also helped fuel speculation across a rapidly expanding marketplace.
“The market has been excessively accelerating at an unprecedented rate, and that aligns with an unprecedented surge in retail investing,” said Kurt Wolfe, a securities attorney at Troutman Pepper LLP.
“When you kind of have a coming together of weird products and Main Street investors, there’s often a regulatory clap back on the horizon.”
Gensler, a critic of overzealous financial risk-taking, helped expand oversight of the post-financial crisis futures market during the Obama administration when he was chairman of the Commodity Futures Trading Commission, making him an ideal choice for Democrats who want to see Washington play a bigger role on Wall Street.
But there’s also bipartisan concern about recent trading activity, like whether new platforms can handle wild swings in markets after many buckled during the GameStop frenzy and whether their sales methods, used to compensate for no-fee access, are running afoul of federal rules.
The SEC’s new Democratic majority is expected to clamp down on the rapid proliferation of new investment products and expand the depth of information required to be disclosed when selling them. Before Gensler was sworn in Saturday, the agency had already taken steps to cool off the rise of another product of the pandemic investment rush: special purpose acquisition companies, which solicit investors to fund the purchase of something with actual value.
Advocates for tougher SEC oversight and stricter disclosures are confident in Gensler’s approach but have concerns about the enormity of the task facing the commission.
“I think Gary Gensler’s biggest challenge right now is he’s got 15 front burner issues … and frankly I don’t think that regulators have seen anything like this since the 1930s,” said Tyler Gellasch, executive director of the Healthy Markets Association, an advocacy group that supports greater transparency in financial markets.
Gellasch said the SEC may need to write or tighten dozens of different rules to account for the ways online trading platforms, viral rallies, easy access to options trades and a voracious appetite for investments with social media clout have upended the stock market.
“There are structural problems that are driving things like GameStop and meme stocks, and those can’t really be swatted down in three months.”
While Gensler may have enough political support among fellow SEC members to push for major changes, he’s certain to trigger backlash from Republican lawmakers, who almost universally opposed his confirmation. He was confirmed last week on a largely party-line vote of 53 to 45 to finish out the remaining two months of the term vacated by his Trump-appointed predecessor, Jay Clayton.
On Tuesday, he was confirmed by the Senate again, this time for a full five-year term. Only four Republicans joined all Democrats in the 54-45 vote.
GOP lawmakers have criticized Gensler’s willingness to take actions that may curb the rush of investors and products into the marketplace, arguing it could distract the SEC from weeding out fraud.
They’ve also fiercely opposed his plans to expand the range of information publicly traded companies must disclose about their climate risks and carbon emissions, diversity, political spending and social engagement.
Sen. Pat Toomey (Pa.), the senior Republican on the Senate Banking Committee, said last week that while Gensler “is a smart and thoughtful person,” his positions on recent stock market volatility “suggest that he may be sympathetic to the paternalistic push by some on the left to make retail investing more expensive and difficult.”
“I’m concerned he will cause the SEC to use its regulatory powers to advance a liberal social agenda focused on issues such as global warming, political spending disclosures, and racial inequality and diversity,” Toomey said.
Even so, investors have shown increasing interest in portfolios that fit certain environmental, social and governance (ESG) standards and have fostered a growing industry of products aligned with those goals.
The SEC has already kicked off the process of strengthening climate disclosures amid a global push among financial supervisors to improve the ways businesses and investors can gauge climate risks. The commission last month also created a climate and ESG taskforce and hired Satyam Khanna, a former commission and Treasury Department staffer, as the agency’s first senior policy adviser for climate and ESG.
“Investors really see this as a central part of the way investment is done, not just here but around the world. What is happening in the U.S. is happening in Europe and Australia and Canada,” said Lisa Woll, CEO of the Forum for Sustainable and Responsible Investment.
“The SEC is fundamentally reflecting what’s happening in the investment marketplace in a way that I think is really meaningful and important.”