What You Need to Know
- Exam staff has remained relatively flat despite growth of more than 20% in number of RIAs.
- House support of a $2 billion fiscal year 2022 budget for the SEC won't be enough.
- Meanwhile, the agency faces emerging challenges in regulating crypto, private funds and firms' digital engagement practices.
Securities and Exchange Commission Chairman Gary Gensler told House lawmakers Tuesday that while the agency completed more than 3,000 exams of firms it oversees in 2020, exceeding the previous year’s numbers, the agency staff has shrunk “about 4% to 5%” over the past five years.
“As our capital markets have grown and technology continues to shape the face of finance, though, the SEC has not grown to meet the needs of the 2020s,” Gensler told members of the House Financial Services Committee during an oversight hearing.
At the end of fiscal year 2016, the SEC had 4,650 people on board, Gensler testified. Nearly five years later, that number had decreased by about 4%.
Since 2016, Gensler continued, “the Division of Examinations’ total staff has remained relatively flat despite growth of more than 20% in the population of registered investment advisors and a 65% increase in the assets managed by these firms. Other divisions are similarly stretched thin.”
The House’s support of a fiscal year 2022 budget of about $2 billion for the SEC, Gensler said, would get the securities regulator back to “only a headcount of 4,859.”
As of September, the agency is working under a voluntary return to the office, Gensler stated.
New Crypto Bill
Rep. Patrick McHenry, R-N.C., ranking member on the committee, introduced the same day the Clarity for Digital Tokens Act, which he said ensures that the regulatory framework for digital assets embraces new technology and innovation by providing a “safe harbor” for startup digital asset projects, while maintaining investor protections.
McHenry told Gensler that he has “strong concerns” about how Gensler’s SEC will regulate in the digital assets space, and “whether the law is on your side.”
“It’s time for Congress to step up and provide clear guidelines that will not allow an SEC chair to change the law by interview or statement or a statement posted on the Commission’s website,” McHenry said. “We need to nurture innovation and technology in this country, not send it overseas.”
McHenry said his bill, which borrows from work done by Republican SEC Commissioner Hester Peirce, “helps bring legal certainty to digital asset projects that we badly need regulatory clarity to launch.”
Gensler told the committee: “We just don’t have enough investor protection in crypto finance, issuance, trading or lending. Frankly, at this time, it’s more like the Wild West or the old world of ‘buyer beware’ that existed before the securities laws were enacted. This asset class is rife with fraud, scams and abuse in certain applications. We can do better.”
He said SEC staffers are working with other financial regulators to protect investors under current authorities and to identify gaps that, with Congress’ assistance, can be filled.
In both of these areas, Gensler stated, the SEC has initiated “projects” on:
- The offer and sale of crypto tokens;
- Crypto trading and lending platforms;
- Stable-value coins;
- Investment vehicles providing exposure to crypto assets or crypto derivatives; and
- Custody of crypto assets.
This year has brought the launch of a number of open-end mutual funds investing in Bitcoin futures traded on the Chicago Mercantile Exchange.
“Subsequently, we’ve started to see filings under the Investment Company Act with regard to exchange-traded funds (ETFs) seeking to invest in CME-traded bitcoin futures,” Gensler said in a recent speech. “When combined with the other federal securities laws, the ’40 Act provides significant investor protections for mutual funds and ETFs. I look forward to staff’s review of such filings.”
Confusing Crypto Statements
McHenry and Rep. Bill Huizenga, R-Mich., Republican Leader of the Investor Protection, Entrepreneurship, and Capital Markets Subcommittee, told House Financial Services Committee Chairwoman Maxine Waters, D-Calif., Wednesday in a letter that Gensler failed to provide sufficient information “to fully understand the Commission’s ongoing deliberations.”
A hearing with all five Commissioners no later than spring 2022, the two lawmakers wrote, “will allow for a balanced and thoughtful look at future rulemakings expected over the next several months.”
Republican members of the committee, McHenry and Huizenga wrote, “appreciated the opportunity to question Chair Gensler on his various confusing statements about cryptocurrency and his unilateral effort to politicize the Public Company Accounting Oversight Board, among other things.”
Private Fund Disclosures
Gensler also told the Financial Services Committee that the securities regulator is working to enhance disclosures offered by private funds — “in particular the conflicts of interest their managers may have and the information they are providing investors about the fees they charge.”