From Archegos to Crypto, Gensler Signals Cop Is Back on Beat

Wall Street’s new overseer confirmed he won’t back down from tough battles with the financial industry as he laid out an agenda for increased regulation in numerous contentious areas.

Gary Gensler, making his first appearance before Congress after being sworn in as Securities and Exchange Commission chairman, pledged Thursday to confront long-simmering issues in the stock market that led to this year’s wild price swings in shares of GameStop Corp. and fueled concerns that retail investors are getting short shrift from popular trading apps.

Gensler, 63, didn’t stop there, as he also vowed to look at new rules for cryptocurrencies, corporate disclosures tied to climate risks and the derivatives that triggered the blow-up of Archegos Capital Management, Bill Hwang’s family office. Again and again, Gensler made clear that he believes tighter oversight is needed.

From Archegos to Crypto, Gensler Signals Cop Is Back on Beat

Democrats, who spent the past four years decrying the Trump administration’s loosening of financial rules and warning of increased risks to Main Street investors, praised the SEC chief’s proactive stance.

“I am very pleased,” said House Financial Services Committee Chairwoman Maxine Waters. The California Democrat added that she wanted to “put Wall Street on notice that we are watching closely.”

Republicans on the panel were less enthusiastic and cautioned Gensler that additional regulations could threaten the commission-free trading that many consumers have embraced, as well as financial-market innovations and the booming markets for digital tokens.

Still, Gensler mostly skirted criticism from either side of the political aisle and was given a pass when he declined to answer questions on issues like a financial transaction tax and the potential for Bitcoin exchange-traded funds. The former head of the Commodity Futures Trading Commission who also worked as a senior Treasury official under President Bill Clinton often begged off, explaining he had only been in the SEC job for several weeks.

“I appreciate the dodge,” Representative Anthony Gonzalez, an Ohio Republican, told Gensler at one point. “This is not your first rodeo, obviously.”

Here are some of the topics Gensler discussed in roughly four hours of testimony:

Archegos Secrecy

Gensler provided an early look at how he might deal with what’s arguably one of the SEC’s biggest blind spots: a lack of knowledge about the undisclosed security-based swaps that Archegos used to make massive bets on companies.

The SEC will consider adjusting some of its rules that require investors to publicly report large stock holdings so they will also cover swaps, Gensler said.

Such a move, Gensler told lawmakers, “would be positive.” He also indicated that the agency would consider revising its margin rules for swaps, which have been approved but are not yet in effect.

Crypto Rules

A former professor at the Massachusetts Institute of Technology who taught a class on blockchain technology, Gensler was asked often about his views on cryptocurrencies. While many token-enthusiasts have heralded his appointment and assume Gensler will pave the way for new investments, he instead took a moderate stance.

Gensler said the market “could benefit from greater investor protection.” He also urged Congress to work on legislation that gives the SEC oversight of crypto trading venues.

“Right now the exchanges do not have a regulatory framework,” he said. He also reminded lawmakers that Bitcoin is not supervised by the SEC because it is considered a commodity rather than a security.

“There’s a lot of authority that the SEC currently has in the securities space and there are a number of cryptocurrencies that fall within that jurisdiction,” Gensler said. “But there are some areas, particularly Bitcoin trading on large exchanges, that the public is not currently really protected.”

Gensler didn’t weigh in on whether the SEC intends to approve a Bitcoin ETF, one of the most consequential issues facing the industry.

His comments may have cooled rallies for some of the hottest cryptocurrencies, with Dogecoin declining for the first time in five trading sessions and Ether snapping a 10-day streak that had seen it jump almost 50%. Bitcoin dropped from the highest levels of the day to trade around $56,000.

GameStop Frenzy

Gensler said he’s pushing the SEC to finish a report by summer on the GameStop mania. The review is likely to touch heavily on brokerages like Robinhood Markets that have reshaped trading with slick mobile apps. Gensler acknowledged that the agency may need to “freshen up” some of its regulations.

Another issue the SEC will look at is “gamification,” Gensler said, noting that the use of video game-like interfaces and behavioral prompts on apps is growing more common in finance.

He said there’s no doubt in his mind that such features prompt consumers to trade more, which increases the risk of losing money. He added that this is particularly the case when retail investors are buying and selling options. Gensler has directed the SEC to seek public comment on gamification, a review that could lead to new rules.

Apps “have made it easier to open accounts” but “we’ve lost that human in the middle saying, ‘is this appropriate,”’ Gensler noted.

Market-Maker Dominance

Gensler fielded many questions about firms such as Citadel Securities and Virtu Financial Inc. that dominate the business of executing retail stock orders. That prompted him to reiterate multiple times that he thinks the industry is too concentrated among a few big players -- a situation that he said can lead to outsize profits for a handful of companies and bad outcomes for consumers.

The market-makers pay retail brokers like Robinhood for the right to handle clients’ orders, an arrangement known as payment for order flow that Democrats argue poses conflicts. But the practice has also facilitated commission-free trades, something lawmakers’ constituents love.

Gensler said at one point that he agrees there are “inherent” conflicts tied to payment for order flow and that the SEC is looking closely at whether it needs to revamp regulations. A crackdown could be particularly impactful on Robinhood, which plans an initial public offering later this year and makes lots of revenue from payment for order flow.

In a Friday interview with CNBC, Gensler added to his remarks, saying boosting “disclosure alone may not do it” when it comes to regulating payment for order flow. He also said that it’s “not clear” that investors are getting best execution on their stock trades when market-makers handle orders.

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