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SEC Will Enforce Reg BI to the Letter: Gensler

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What You Need to Know

  • The new SEC chairman says the agency will get the most out of Regulation Best Interest while also evaluating the rule.
  • SEC plans to release this summer a report on the market volatility spurred by the Reddit GameStop incident.
  • Congress should look at creating a market regulator for crypto exchanges, Gensler says.

Securities and Exchange Commission Chairman Gary Gensler said Thursday that while the agency plans to “vigorously get the most” out of Regulation Best Interest, the agency will “constantly evaluate” how the rule is serving investors and it could be modified.

During a question-and-answer session at a hearing held by the House Financial Services Committee on the run-up in GameStop shares earlier this year, Rep. Ann Wagner, R-Mo., queried Gensler on whether he planned to make “any amendments to Reg BI.”

Gensler responded: “I think that it’s important that investors actually have brokers take their best interests at heart, and that’s what we’re going to do through examination and enforcement, guidance ensure that that rule is fully complied with as written.”

Later in the hearing, Gensler stated that “we’re going to vigorously get the most out of Regulation Best Interest, but we’re also going to evaluate. If it’s not serving the purpose of investors then we will update and freshen that rule as well as other rules because we always have to be evaluating that investors come first, aligned with our three-part mission.”

Gensler also told lawmakers during the hearing titled, Game Stopped? Who Wins and Loses When Short Sellers, Social Media, and Retail Investors Collide, Part III, that SEC staff “is vigorously reviewing for any violations” the market volatility witnessed in January during the Reddit GameStop short squeeze and that he’s directed staff to consider whether “expanded enforcement mechanisms” are necessary.

The securities regulator, Gensler told lawmakers, plans to release this summer a report on the market volatility spurred by the Reddit GameStop incident.

Said Gensler: “We’ve all come to hear the general story: a stock that went from $20 to $480 and back down to $40, all in a matter of weeks. It opened at $162 Wednesday of this week. GameStop, though, was just one of the many so-called meme stocks that exhibited significant price volatility, trading volume, and attention in the markets in January. As these events reached an apex in late January, a number of broker-dealers imposed trading restrictions on some of these stocks.”

He added, “While entities such as GameStop, Melvin Capital, Reddit and Robinhood have garnered a significant amount of attention, the policy issues raised by this winter’s volatility go beyond those companies. Instead, I think these events are part of a larger story about the intersection of finance and technology.”

Gensler noted that while there’s “no settled definition of gamification, … broadly, it refers to the use of game-like features — such as points, rewards, leaderboards, bonuses, and competitions — to increase customer engagement.”

He’s asked SEC staff “to prepare a request for public input for consideration” on these gamification issues.

“We need to ensure investors using apps with these types of features continue to be appropriately protected and consider how all of our rules apply in these situations, including Regulation Best Interest,” Gensler said.

Since “many of our regulations were largely written before these recent technologies and communication practices became prevalent,” Gensler continued, “I think we need to evaluate our rules, and we may find that we need to freshen up our rule set. If we don’t address this now, the investing public — those saving for their futures, retirements and education — may shoulder a burden later.”

Gensler also said that shortening the standard settlement cycle from the current T+2 “could reduce costs and risks in our markets,” and that he’s directed the SEC staff “to put together a draft proposal for the commission’s review on this topic.”

As to the failure in late March of the family office Archegos Capital Management “and the significant losses incurred by several global financial institutions that provided prime brokerage services to Archegos,” Gensler said he’s asked SEC staff to consider recommendations for the commission “about whether to include total return swaps and other security-based swaps under new disclosure requirements, and if so how.”

Said Gensler: “At the core of that story was Archegos’ use of total return swaps based on underlying stocks, and significant exposure that the prime brokers had to the family office. Under Dodd-Frank, Congress gave the SEC rulemaking authority to extend beneficial ownership reporting requirements to total return swaps and other security-based swaps.”

On Crypto Regulation

As to bringing clarity to cryptocurrency regulations, Gensler said that working with Congress, “it would be good to consider … whether to bring greater investor protection to the crypto exchanges. If that were to be the case, because right now the exchanges, trading in these crypto assets do not have a regulatory framework either at the SEC or our sister agency the Commodity Futures Trading Commission — that could instill greater confidence. Right now there’s not a market regulator around these crypto exchanges and thus there’s really not protection against fraud or manipulation.”