Gary Gensler crafts SEC into a mighty sandcastle

Virtu Financial

25/01/2024 13:00

(The author is a Reuters Breakingviews columnist. The opinions
expressed are her own.)
    By Anita Ramaswamy
       NEW YORK, Jan 25 (Reuters Breakingviews) - It took more
than 10 years for the U.S. securities watchdog to finally
approve a bitcoin exchange-traded fund. Yet overall, Securities
and Exchange Commission chief Gary Gensler has a notable
penchant for speed. Less than three years into his term, he has
notched big wins, set ambitious goals and embedded an intense
work ethic. Gensler’s main challenge isn’t inaction, but the
risk that his achievements, like an impressive sandcastle, get
washed away.
    Appointed by Democratic President Joe Biden in 2021, Gensler
brought a nuanced understanding of technology, as shown in the
digital currencies course he taught at the Massachusetts
Institute of Technology, and a track record of getting things
done as former head of the Commodities Futures Trading
Commission.
    So far, the SEC chief has been undeniably active, outrunning
his predecessors with fast-paced proposals and a vigor that has
at times ruffled feathers amongst his own resource-constrained
staff. Even critics who spoke with Breakingviews concede he is a
hard worker. But how effective have his efforts been thus far?
There are three good measures with which to size Gensler up: the
rules he’s put forth, the penalties he has exacted from
miscreants, and the way he has shaped the SEC’s purpose.
    On the rulemaking front, Gensler’s breakneck pace sets him
apart. The agency is on track to propose and finalize 64 new
rules by the end of his first four years in office, securities
industry group SIFMA reckons. That significantly beats the 22
rules finalized by former chair Mary Jo White and even the 43
set by Gensler’s immediate predecessor Jay Clayton over the same
amount of time. Under Gensler, the SEC has written a sweeping
set of rules for private funds, set up new disclosure
requirements around cyberattacks and forced companies to present
executive compensation in a new way. On Wednesday, the agency
adopted rules protecting investors in so-called special-purpose
acquisition companies.
    From those who flout the rules, Gensler has squeezed more
penalties. While the number of actions Gensler’s SEC has levied
each year is roughly in line with previous chairs, his average
full-year haul of $5.7 billion is higher than the comparable
metric for White and Clayton. The targets include Wall Street’s
biggest fish. The SEC extracted hundreds of millions of dollars
from Morgan Stanley  MS.N  to end a probe into the bank’s
alleged unauthorized trading disclosures and clamped down on
several financial institutions’ use of messaging platforms like
WhatsApp.
    Gensler has also cast a wider net by expanding the SEC’s
whistleblower program, which compensates informants who provide
the agency with tips about corporate wrongdoing. In 2023, the
SEC awarded nearly $600 million to whistleblowers, a record-high
sum. Gensler has also fought to ensure companies don’t penalize
their employees for reporting violations, a charge he levied
against hedge fund D.E. Shaw, which agreed to pay the agency a
$10 million settlement last year.
    Where Gensler’s record gets fuzzier is in the shiny new
world of cryptocurrency, one of his specialist subjects. In a
speech at a securities enforcement conference last October, he
dedicated a whole section to his actions in the industry,
touting penalties he had wrested from celebrities such as Kim
Kardashian for promoting digital currencies without disclosing
potential conflicts of interest. Gensler’s crypto-skepticism
looked somewhat warranted after the high-profile collapse of
exchange FTX, whose founder Sam Bankman-Fried looted some $8
billion in customer funds, eroding trust in the market.
    But the trouble with Gensler’s approach is that he
overstepped his turf without a legislative mandate. Sometimes
Congress instructs agencies to create rules for a new industry,
but when it doesn’t, they must either wait or take matters into
their own hands. On that score, there’s a big difference between
his SEC tenure and his zeal at the CFTC. Just over a year into
his term at the commodities and futures regulator, Congress
passed the Dodd-Frank Act, aiming to clean up Wall Street after
the 2008 financial crisis. That legislation explicitly tasked
Gensler’s CFTC with making sweeping changes to the swaps market.
    The majority of new rules Gensler has proposed or finalized
at the SEC, conversely, were not required by Congress, according
to the Committee on Capital Markets Regulation. That has opened
a door for companies to allege he acted outside his authority,
meaning courts will ultimately decide whether to uphold or
strike down rules that are challenged.
    Crypto exemplifies the cracks in Gensler’s method. Congress
hasn’t even opined on whether cryptocurrencies are securities or
commodities, which would decide which regulator has
jurisdiction. Seizing upon the legislative vacuum, Gensler sued
several crypto firms for illegally selling securities, but many
are pushing back. A federal judge disagreed last October with
the SEC’s judgement in a case against Ripple Labs, over what
makes a security. A suit against $30 billion crypto exchange
Coinbase Global  COIN.O , which hinges on similar arguments,
could be more vulnerable to judicial disdain, considering the
commission itself greenlit the company’s initial public offering
years earlier. An appeals court derided Gensler’s rejection of a
bitcoin ETF application as “arbitrary and capricious” last
August, which may help explain why the SEC approved such funds
from BlackRock  BLK.N , Grayscale and others in January.
    The SEC isn’t the only agency being drawn into a war on
regulation. Disgruntled trade groups and companies are taking
aim not just at specific rules, but at the funding, governance
and rulemaking practices of the Consumer Financial Protection
Bureau, the National Labor Relations Board, and others. Duking
rules out in court is becoming a high-profile alternative to
negotiating with the rules’ authors. Several industry groups are
suing the SEC over its new private fund standards. And like
Coinbase, other firms at the receiving end of Gensler’s suits,
like market maker Virtu Financial  VIRT.O , are fighting back
with equal vigor. To make matters more challenging for Gensler,
the U.S. Supreme Court may likely overturn a longstanding
precedent requiring judges in some cases to defer to agencies,
which would further erode the SEC’s powers.
    As SEC chair, Gensler has proven to be a creative
rule-maker, but that may have only emboldened his opponents.
It’s not that Gensler was wrong to ask tough questions about
crypto, or to step into the gaps left by squabbling lawmakers.
But it looks like his lofty ambitions for the agency have
invited a uniquely ferocious backlash. Whether he stays until
his term ends in 2026 or stands down sooner, he may eventually
leave an SEC that’s weaker than the one he originally joined.
    Follow @AnitaRamaswamy on X

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Graphic: Gary Gensler's SEC has put a bigger squeeze on
miscreants    https://reut.rs/3vHy4JP
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 (Editing by John Foley, Aditya Sriwatsav and Streisand Neto)
 ((anita.ramaswamy@thomsonreuters.com))