Incoming Securities and Exchange Commission Chairman Gary Gensler faces numerous tasks once confirmed by the Senate, with the Reddit GameStop squeeze likely front and center.
Once confirmed, “a huge number of issues await” Gensler, according to Ron Rhoades, director of the personal financial planning program and assistant professor of finance in the Gordon Ford College of Business at Western Kentucky University.
“The issues seen around trading in GameStop might be the most visible, and I anticipate some form of enforcement action addressing the marketing of ‘free’ stock trades to individual investors,” Rhoades told ThinkAdvisor in an email.
Barbara Roper, director of investor protection for the Consumer Federation of America, added in another email to ThinkAdvisor that “because key investor protections, including [Regulation Best Interest], only come into play when a recommendation is made, Robinhood is free to give its customers easy access to risky trading strategies, and to use psychological nudges to encourage those strategies, without being held accountable for the appropriateness of those actions.
“I think the SEC, working with FINRA and the state securities regulators, will need to develop an appropriate regulatory response to ensure that firms can be held accountable for the way in which they design their platforms and the nudges they include in their apps,” Roper explained.
Right now, she continued, “the things that are really profitable for a firm like Robinhood that depends on payment for order flow — trading on margin, rapid trading in individual stocks or, better yet, options — are generally harmful for the small, inexperienced retail investors they seek to serve.”
Longer term, “the SEC might ban payment for order flow, which is a serious challenge to the quasi-fiduciary requirement of brokers to achieve best execution,” Rhoades opined.
James Angel, associate professor of finance at Georgetown University’s McDonough School of Business, told ThinkAdvisor in an email that the GameStop incident “highlights some of the leaks in our equity market structure that need to be fixed.”
“Our antiquated two-day [trade] settlement system needs to be sped up,” Angel explained. “We need better disclosure on short selling and securities lending. Investors should have access to daily short interest data and not the stale twice-monthly data we get now.”
Reg BI, ESG and Bitcoin
The SEC’s “flawed interpretation of fiduciary duties arising under the ’40 Act, a replacement for the misleading (by its very name) Regulation Best Interest, and a re-write of the Form CRS language,” await Gensler’s attention, along with a hard look at environmental, social and governance focused investing, according to Rhoades.
Jim Lundy, partner with Faegre Drinker in Chicago, said on the firm’s recent Inside the Beltway webcast that, particularly in the near term of Gensler’s tenure, the SEC “will enforce Reg BI. It’s a tool kit in enforcement’s arsenal … a disclosure-based rule that they can examine for and enforce. And it also is a rule that has a compliance obligation attached to it, which has essentially a failure to supervise component embedded in there.”
Sandra Grannum, partner at Faegre Drinker, agreed. “The question just becomes the level of enforcement of the rule and the scrutiny and how it will be interpreted,” she said on the webcast. “It is a principle-based reg; it’s not rule-based, so there will be a lot of interpretations as to … what will be sufficient to satisfy the rule.”
Gensler’s arrival may also “accelerate the SEC’s timetable for approving Bitcoin ETFs, which has stalled in part due to [former SEC Chairman Jay Clayton's] view that even the most stable tokens will need to be better regulated before receiving approval to be traded on a major exchange,” Ropes & Gray attorneys Jeremiah Williams, Helen Gugel and Stefan Schropp wrote in a recent briefing.
Gensler is currently a professor of blockchain, digital currency, financial technology and public policy at the Massachusetts Institute of Technology, and senior adviser to the influential Digital Currency Initiative of the MIT Media Lab.
“Although his public comments have been a mixed bag, including criticism and defenses of various developments in the digital asset space, he [Gensler] is by virtually all accounts an expert in the area and has the appropriate experience and knowledge to make informed policy judgments,” the Ropes & Gray attorneys state.
The SEC recently created a new position, senior policy advisor for climate and ESG, in the office of acting Chair Allison Herren Lee. Satyam Khanna, a former senior legal counsel to former SEC Commissioner Robert Jackson, is filling that role.
Labor Fiduciary Rule
The Labor Department’s fiduciary prohibited transaction exemption to align with Reg BI went into effect Tuesday.
The exemption, called “Improving Investment Advice for Worker & Retirees,” is “broadly aligned” with Reg BI, according to the Employee Benefits Security Administration.
Labor’s action in letting the Trump administration-era fiduciary PTE take effect “raises the priority on fixing Reg BI — and working with DOL to achieve that,” Roper said. ”There’s a lot they [the SEC] can and should do in the short term to define best interest in a way that gives it real meaning and to strengthen and clarify the requirements around mitigation of conflicts.
“The rule’s chief weakness — that it is vague and undefined — now becomes its strength, because a majority on the Commission with a strong commitment to investor protection now have an opportunity to define it in a way that delivers strong protections,” she explained.
Rhoades added that “at least one consumer group is prepared to file” a legal challenge to Labor’s PTE.
Rhoades anticipates Labor issuing “new ‘guidance’ on the rule, which might strengthen it slightly.”
Within the next 12 months, Rhoades said, he hopes Labor moves move forward “with a replacement proposed rule” to “restore ERISA’s tough fiduciary standard, apply fiduciary standards to nearly all providers of investment advice to plan sponsors and plan participants, and apply fiduciary standards to the rollover of IRAs and investment advice to IRA owners thereafter.”
In the meantime, Brad Campbell, partner at Faegre Drinker in Washington, warned Tuesday on the firm’s webcast that “there’s things to be put into place that in all likelihood have not been put into place by your RIA or your broker-dealer because no one actually thought this exemption was going to go into effect today.”
The anticipation, said Campbell, a former head of Labor’s EBSA, “was the Biden administration would delay it by an additional 60 days and review it.”
Campell added: “Before you can use the new exemption, your financial institution — RIA or broker-dealer — is going to have to provide new policies/procedures, take new steps, provide training, go through that whole process. That’s in part why DOL allowed the current non-enforcement policy to persist until December, so there’s time for folks to make that transition.”