Finance hits back against US regulator’s rulemaking spree

Securities and Exchange Commission chair Gary Gensler’s ambitious regulatory agenda is igniting fierce opposition from the financial industry, which is challenging what it views as egregious overextension of the securities watchdog’s legal authority.

In recent months, the SEC has been targeted in lawsuits from the US Chamber of Commerce, a business lobby, over a rule expanding stock buyback disclosures, and a coalition of private equity, venture capital and hedge fund groups last week sued to block sweeping new rules for private fund managers adopted by the SEC last month.

Its crackdown on the crypto industry has also encountered resistance, as the company backing the Ripple digital token challenges an SEC civil lawsuit on the basis that it goes beyond the agency’s power to regulate securities. 

And last month, the regulator suffered a loss when a federal appeals court in Washington ruled it had been wrong to reject asset manager Grayscale’s application to launch a US-listed exchange traded fund tracking the price of bitcoin, calling the denial “arbitrary and capricious”.

Gensler is among a set of senior regulators appointed by Joe Biden’s administration who have taken a tougher rulemaking and enforcement stance. The SEC chair argues this is necessary to fulfil the regulator’s mandate and protect US investors. 

Gensler has built a reputation as an active regulator. He served as chair of the Commodity Futures Trading Commission while the commodities regulator was moving to formulate and implement its response to the 2008 financial crisis. In 2021, he was appointed by Biden to chair the SEC.

The agency’s chair has taken his new regulatory mission seriously. Under his leadership the agency has put forward more significant rules and regulatory proposals than any of his predecessors since the aftermath of the 2008 global financial crisis.

Gensler knows Wall Street, which scares a lot of people who’ve gotten rich under the current system

According to the Committee on Capital Markets Regulation, known for being critical of regulation, Gensler’s SEC has presented 47 proposals that substantially affect market participants and adopted 22 of them in the first 850 days of his leadership, ending on August 15. That marks a record in both categories since ex-SEC chair Mary Schapiro steered the regulator’s response to the financial crisis after becoming chair in January 2009. She put forward 59 proposals and 18 final rules.

To detractors, including Republican policymakers and market participants, Gensler has gone well beyond the limits of the SEC’s authority. To supporters, he is proposing long overdue rules that more accurately reflect modern-day markets after decades of insufficient regulation. 

The SEC said that each of its “proposals is grounded in authorities granted by Congress and the agency’s three-part mission.”

“We’re updating our rules for the technology and business models of the 2020s with an eye towards ensuring the markets work for investors and issuers alike, not the other way around,” it added.

The proposals put forward by Gensler stand out for their breadth, with the SEC crafting rules for areas ranging from mutual fund pricing to cyber security and public companies’ climate disclosures. 

John Coffee, professor at Columbia Law School, argued that while “Gensler is seen as aggressive, and to a degree he is, the SEC is actually paralysed on some issues because of the new limits that the courts have placed on agency rulemaking.” Coffee was referring to the “major questions doctrine” embraced by the US Supreme Court in recent rulings, which holds that regulators “cannot take a significant new step that has not been authorised by Congress”.

Patrick McHenry, the Republican chair of the House financial services committee, told Gensler during a hearing in April that he was pursuing an “overly aggressive rulemaking agenda”. McHenry cited “serious concerns that the rulemaking process is being rushed, undermining the quality of our securities laws and risking negative unintended consequences”.

Bryan Corbett, president and CEO of the Managed Funds Association, the US hedge fund trade group, said the regulator’s agenda, “by and large, is not informed by market data, a market failure, or a congressional mandate. It will impede the US capital markets, hurt the economy, and decrease the investment returns for pensions, foundations, and endowments”. 

The private fund rules were the latest example of the SEC “exceeding its statutory authority”, he added. The MFA was among the plaintiffs that earlier this month kicked off a legal battle against the agency over rules that broadened disclosure and imposed new limits on how private funds handle customers including institutional investors.

The lawsuit filed by six industry groups to block the new rules argued that the package was “unwarranted, unlawful, and will harm the private fund industry and hamper the jobs, innovation, and other benefits private funds bring to the economy”. 

Consumer groups, however, said the rules would improve accountability and transparency in a ballooning $27tn industry. They hailed measures to bar side agreements that give some investors more favourable terms on critical matters such as redemption limits.

Gensler last month said the rules would “promote private fund advisers’ efficiency, competition, integrity, and transparency. That benefits investors, issuers, and the markets alike.”

Carter Dougherty, spokesman at Americans for Financial Reform, a progressive non-profit, said that “rather than reading Gensler’s energy as a problem, let’s open our minds to the idea that his work is long overdue”. 

“The fact that previous SEC chairs either pulled away from that mission or actively thwarted it only underscores how urgent his work is. And, Gensler knows Wall Street, which scares a lot of people who’ve gotten rich under the current system,” Dougherty added, referencing Gensler’s 18-year stint at Goldman Sachs. 

Dennis Kelleher, chief executive of the Better Markets campaign group, said the SEC “is decidedly not engaged in regulatory over-reach,” adding that the agency’s relatively small size meant it was “usually outgunned and outmanned by a gigantic financial industry with virtually limitless resources and allies that can easily overwhelm the SEC”. 

SEC rulemaking often dents the industry’s profits and bonuses, Kelleher said, but it fulfils the regulator’s mandate of seeking disclosures and limiting conflicts of interest and other illegal conduct. 

“Those anti-investor practices are very profitable and the industry will do whatever it can to protect those profits, including filing frequent lawsuits,” he added.