President Biden’s choice to be the top cop on Wall Street has been left sitting on the sidelines as the Securities and Exchange Commission (SEC) faces growing pressure to sort out the GameStop stock frenzy.
A logjam in approving Biden’s Cabinet picks has delayed Gary Gensler’s potential confirmation as SEC chairman, leaving the regulator without a permanent leader to bridge a partisan 2-2 split on its board.
Lawmakers in both parties are calling on the SEC to take action after Reddit-driven stock rallies roiled the financial sector and forced several major investing companies to restrict customers’ trades. While the SEC said last week it will investigate the fallout, Democrats and Republicans are set to dial up the political heat in two congressional hearings on the state of the stock market.
“The timing of last week’s events was grossly unfortunate in that it took place during a transition of power in the White House,” wrote Jim Toes, president and CEO of the Security Traders Association, in a Sunday letter to the trade group’s members.
“The Senate, while doing its best, has yet to confirm [Gensler] and the natural turnover of SEC staff that comes with a changing of the guard could delay the response time of our industry’s chief regulator,” he added.
Whether Gensler will face senators before Congress sounds off on how the SEC should address the market chaos is unclear. A spokesperson for the Senate Banking Committee declined to comment Monday on the timing for Gensler’s confirmation hearing.
Even so, the GameStop saga will likely be the primary focus of Gensler’s hearing, and further delays could hamstring how much the SEC can respond to political pressure.
“This is not funneling capital to its best and highest uses to drive our economy. That’s not what’s going on here. And if you’re the SEC, that has to be your fundamental concern,” said Tyler Gellasch, executive director of the Healthy Markets Institute, an advocacy group that supports greater transparency in financial markets.
“Your fundamental focus has to be how to make sure that our capital markets are working to drive capital to its best and highest uses to make our economy heal, and give investors reasonable returns and security and stability,” Gellasch added.
The SEC is facing a slew of tough questions and novel issues amid intense scrutiny from Washington and Wall Street alike. The agency’s priority will be determining whether the Reddit-organized short squeeze on GameStop, theater chain AMC Entertainment, Tootsie Roll and other struggling companies amounted to illegal stock market manipulation.
While privately coordinated efforts to drive up the price of a stock are often illegal, experts say the public nature of the online campaign means there’s little precedent to guide the SEC.
“What happens if coordination is out in the open? Is it still corruption? Is it still illegal? If what we saw on Reddit was an email between one hedge fund manager and another hedge fund manager, you’d see it as an exhibit in a court case,” Gellasch said.
The SEC is also likely to probe why Robinhood and other major trading platforms prevented users from buying shares of GameStop and other quickly rising stocks, a decision that drew intense bipartisan condemnation.
Democrats and Republicans blasted Robinhood for preventing customers from making purchases still available to hedge funds and other well-established investors. The company said it did so to comply with SEC capital rules for stock brokers and raised billions from its own backers under orders from internal industry regulators.
“There should not be one set of rules for big hedge funds and another set for average individual investors that disadvantage retail investors. We need fair rules that protect average Americans, including mom and pop investors, and the integrity of our securities markets,” said Sen. Jack Reed (D-R.I.), a member of the Senate Banking Committee, in a Saturday statement.
The delay in Gensler’s confirmation may not seriously hinder the SEC’s investigations into misconduct or regulatory lapses, which are driven primarily by career staff. But how the agency plans to update regulations — and respond to the political pressure to do so — will be a key question facing Gensler during his eventual hearing.
Democrats are calling on the SEC to update capital requirements for stock brokers, write clearer standards for market manipulation, force short-sellers to be more transparent and crack down on overly speculative behavior.
“The Commission must review recent market activity affecting GameStop and other companies, and act to ensure that markets reflect real value, rather than the highly leveraged bets of wealthy traders or those who seek to inflict financial damage on those traders,” wrote Sen. Elizabeth Warren (D-Mass.) in a Friday letter to the SEC.
Republicans have also called on the SEC to investigate any potentially illegal activity or regulatory lapses involving GameStop stock and to protect investors from fraud and misleading information. Even so, they’ve insisted that the SEC’s job is not to prevent investors from making informed — if risky — decisions with their own money.
“You certainly should be protecting people from dishonesty, from fraud, from misrepresentation, from false information,” said Sen. Pat Toomey (Pa.), the top Republican on the Senate Banking Committee, in a Monday interview with CNBC. “But to tell people what they can do with that information is so paternalistic and so contrary, really, to the interest of investors in the long term that I would be strongly opposed to that.”