Securities and Exchange Commission (SEC) Chairman Gary Gensler took a bit of a beating yesterday during a House Financial Services Committee hearing. The gathering also included all other commissioners which provided an opportunity to hear opposing perspectives held by the Republican minority.
The hearing memo issued in advance of the gathering explained:
“Under Chair Gensler, the SEC has made the digital asset ecosystem a primary focus. The SEC continues to pursue an aggressive enforcement and regulatory agenda to extend the SEC’s authority over the entire digital asset ecosystem. In particular, under Chair Gensler, the SEC has failed to release guidance explaining how the SEC determines whether a digital asset meets the definition of a security. Rather, Chair Gensler and the SEC have publicly opined, including before Congress, that the “vast majority” of digital assets are securities. The SEC’s lack of clear guidance or regulatory framework has left the digital asset ecosystem in a state of regulatory and legal uncertainty, threatening the ecosystem’s existence in the United States.”
Committee Chairman Patrick McHenry, who will leave Congress at the beginning of next year, opened the oversight hearing by lambasting Gensler on multiple fronts. In prepared remarks, McHenry criticized Gensler for turning the SEC into a “rogue agency” that “routinely exploits its authority to the detriment of our capital markets, innovation, and the American people.” In recent days, Republicans have sent a letter demanding the SEC rescind Staff Accounting Bulletin (SAB) 121 – a mandate that makes it more difficult for firms to provide custody for digital assets.
McHenry castigated the speed and number of new rules the Commission has pursued during his tenure, many of which overlap. Interested parties have struggled to provide feedback on the “interconnected rules that exceed the SEC’s statutory authority—often with inadequate justification, economic analysis, and public engagement.”
McHenry pointed to the Commission’s approach to digital assets or crypto, which has languished in the realm of regulation by enforcement. McHenry highlighted the Commission’s shortcomings regarding digital assets and pursuit of climate disclosure mandates, which go far beyond the agency’s mandate.
At the same time, McHenry noted that the SEC has done little to improve access to capital, one of its mission’s three pillars.
Ranking Member Representative Maxine Waters defended the SEC under Gensler’s leadership. Waters complimented Gensler’s tenure at the Commission:
“I want to start by recognizing the good work the SEC has done under the leadership of Chair Gensler. Despite repeated attacks against the agency from my Republican colleagues, the SEC has lived up to its mission of protecting investors and ensuring our capital markets remain the envy of the world. “
Waters pointed out the many enforcement actions pursued by the SEC during Gensler’s reign while stating the country is tired of “the extreme MAGA Republican party in Congress.”
While Waters stood firmly in support of Chairman Gensler, not all Democrats let his leadership of the SEC avoid criticism.
During the first questions addressed to the Commissioners, McHenry asked Commissioner Hester Peirce, a Republican, about the treatment of digital assets. Peirce declared there is “no regulatory clarity.” Peirce said the SEC is “trying to be ambiguous.” Is the token a security? Is it part of an investment contract? If so, what is that contract?
“By using imprecise language, we are able to apply securities laws. We have fallen down on our duty as a regulator. We should have wrestled with the difficult questions,” said Peirce.
The other Republican Commissioner, Mark Uyeda, echoed Peirce’s sentiment, stating that the Commission could have articulated how to apply this [Howey] test to crypto, as they have done this before.
“We have chosen not to go down that path. We are in our second decade of thinking about this issue.”
Representative Pete Sessions criticized the many enforcement activities undertaken during Gensler’s leadership, stating that he believes the SEC lacks balance and fairness and is pursuing “selective enforcement.”
“You want to make an example of some of these people,” and “If you did not intend on getting in trouble, you should be able to work your way out of trouble.”
Peirce shared her concerns about the pace and breadth of new regulations and the complexity involved.
“What people have been telling us is that we have been moving too fast.”
Representative Andy Barr pummeled Gensler on their investigation of Coinbase, a publicly traded crypto exchange. Coinbase apparently does not know which cryptocurrencies the Commission believes are securities—even though they have asked. Barr said that Coinbase provided multiple paths for registration, but the SEC has ignored them and their attempts at compliance.
Regarding new Climate Disclosure rules which are being challenged in the courts, Peirce admitted the Commission was on shaky grounds in making these new rules as they do not reflect materiality.
The rising cost of going public is a persistent theme. The rule upon regulation strategy by the Commission has made becoming a public firm cost prohibitive – something that has harmed smaller investors.
“… if companies do not go public early in their lives, smaller investors to not gain access to them. This is a real problem,” said Peirce. The Commissioner said the strategy of making it more difficult for firms to raise private capital in an attempt to boost public markets is not a good path.
“We need to think about what we have done wrong in the public markets,” explained Peirce.
One of the most pointed moments of the hearing was when Representative Ritchie Torres, a Democrat, disparaged Gensler for his obtuse treatment of NFTs [non-fungible tokens], asking the Chairmen if he plans to pursue artwork and Yankee’s tickets next, perhaps determining they are securities.
“By selling you the Yankee ticket, am I conducting an unregistered security offering?”
“The expectation that an asset could appreciate could be applied to any collectible. It is so open-ended it lacks any limiting principle.”
Uyeda told the hearing participants that it should be easier for entrepreneurs to raise capital.
“[This is] a very significant problem. 78% have problems finding capital. We need to have this on our agenda. We have a very complicated system for raising capital. We can raise equity capital, but there are a lot of footfaults in our system. You should not need a lawyer for $1000 an hour before you raise capital. We could simplify a lot of things. Don’t lie, cheat, or steal. That is the only rule you need. We need to simplify our rule book.”
Uyeda also voiced his support for making private securities funds available to retail investors. “Diversification is important,” he said, noting that his portfolio at CALPERS [California Public Employees’ Retirement System] holds private securities, something not available for everyday IRA/401K retirement vehicles.
Commissioner Peirce suggested the Commission provide guidance on Finders, pursue a micro-exemption, and make changes to improve crowdfunding while expanding the definition of an accredited investor. All of these could boost capital formation. The Gensler Commission has dismissed many of these issues.
Peirce also voiced her support for a “Sandbox” where innovators could test concepts on a smaller scale in partnership with regulators.
While the topics were varied and the hearing several hours long, the Republicans largely critiqued the lack of clarity on digital assets, activist policies under ESG (including climate disclosure), aggressive rulemaking, and the paltry support for smaller firms in need of growth capital.
As we are nearing an election, few things will change until next year—if at all. While both Peirce and Uyeda will be in a good spot to become Chair of the SEC if former President Trump wins, an SEC under the current Vice President Kamala Harris is largely unknown. It could be more of the same.
There has been much speculation that Chairman Gensler is positioning himself to level up in the government, perhaps as Secretary of the Treasury. His close relationship with Senator Elizabeth Warren, a noted crypto detractor, could help support his ambitions.
The Hearing may be watched below.
