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Trendspotter: Markets Are Evolving Faster Than the SEC

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The Trend

Surging growth in IPOs and SPACs, as well as challenges associated with regulating cryptocurrencies, fintech and private equity will prove too much for an underfunded — and understaffed — SEC to police.

The Driver

SEC Chairman Gary Gensler told members of the House Appropriations Committee in recent testimony that while the capital markets have grown, “the SEC has not grown to meet the needs of the 2020s.” The agency not only needs more funds, but more people, Gensler said.

The SEC is requesting $1.993 billion for FY 2022 so that it can add 65 positions — including nine examiners, nine new positions in the Division of Enforcement, and five new positions to bolster the agency’s data analytics capabilities.

Gensler pushed for more resources so that the agency can police these market developments:

  • A “once-in-a-generation wave” of traditional initial public offerings and “an unprecedented surge” in special-purpose acquisition companies, or SPACs;
  • “Significant growth” in the number of private funds, particularly private equity and venture capital funds;
  • The “highly volatile and speculative asset class of crypto tokens”; and
  • Fintech startups, which “raise a variety of policy questions around gamification, behavioral prompts, the use of data analytics.”

We’re interested to hear from you. How do you see these trends reshaping the advisory business? Let me know what trends you’re spotting this week at [email protected]

The Buzz:

Jim Lundy, partner, Faegre Drinker in Chicago

Chair Gensler has one of the deepest and most sophisticated regulatory and enforcement backgrounds of all of the SEC chairs. His testimony regarding highlighting 5 key capital market trends, and in particular IPOs and SPACs, reflects that. While his statement focuses on possible proactive regulatory measures such as rulemaking, he does also discuss focusing the Division of Enforcement’s efforts in this area. Thus, while Chair Gensler’s regulatory and rulemaking initiatives may be forward looking, we should expect enforcement initiatives as well to address what he may have inherited regarding the booming IPO and SPAC marketplace.

Karen Barr, president and CEO, Investment Adviser Association

It’s critically important that the SEC be adequately funded to do its job; it’s getting tougher all the time to keep up with technology, data analytics, cryptocurrency … The SEC needs to be fully equipped to analyze all these new trends in real time.

[For registered investment advisors], keeping up with the trends in cryptocurrency is very important. Clients are asking advisors about all kinds of cryptocurrency and it’s important to understand both the landscape of cryptocurrency, digital assets … as well as the regulatory environment, which is fluid at the moment. Chair Gensler’s focus on the structure of regulation for digital assets will be of importance. In terms of custody, the SEC is looking at and asking for comment on how it can adapt their rules for custody of digital assets. [The SEC] is taking a look at the custody rule as a whole, but the digital asset piece is a very important aspect of it. It’s a broker-dealer issue but it’s also an investment advisor issue in that investment advisors have to use qualified custodians to comply with the custody rule.

Carlo di Florio, Chief Global Services Officer, ACA Group 

Chair Gensler’s testimony identified FinTech trends and developments as requiring additional resources so the SEC can adequately regulate FinTech. His testimony reflected an appreciation for the positive contributions of FinTech in terms of greater access to our capital markets, while at the same time clearly recognizing the risks to investor protection and market integrity posed by the use of gamification and data analytics to trigger behaviors that could be harmful to investors and potentially even pose systemic risks. RegTech and data analytics, another key trend Gensler noted, will be critical in helping regulators and firms deploy effective surveillance that can detect and mitigate key risks and detrimental behaviors associated with FinTech.