Republicans didn’t waste any time questioning the moves and motives of Securities and Exchange Commission (SEC) Chair Gary Gensler at the House Financial Services (HFS) “SEC Oversight” hearing today.
Video is here.
Minutes before the hearing commenced, a full-throated rejection by the Committee’s Republican caucus “slamming the agency for its persistent failure to conduct thorough economic analysis or consider stakeholder feedback regarding its regulatory agenda” was announced in the form of a letter to Chair Gensler. Read the release -and the letter.
Yesterday’s letter on Bitcoin spot market ETF’s sent by HFS committee member Rep. Mike Flood may have been more impressive given its bipartisan nature – both Rep. Ritchie Torres (D, NY) and Rep. Wiley Nickel (D, NC) signed on.
two things
As it turned out, during the hearing, the most revelatory moment related to digital assets was arguably provided by a Democrat (Rep. Torres (D, NY) – see below), Tokenization is a tripwire when it comes to securities laws for Chair Gensler.
And, another highlight was Rep. Mike Flood’s (R, NE) questioning of Chair Gensler about Staff Accounting Bulletin 121 (SAB 121) and, separately, Flood’s announcement about the new “Uniform Treatment of Custodial Assets Act” which would gut the SEC’s bulletin. See below.
Also: This was an uninterrupted 4.5 hour hearing that ended at 2:29 p.m. ET. Wow. April’s House SEC Oversight hearing was only 3 hours and 45 minutes.
opening statements
Chair Patrick McHenry’s (R, NC) terse opening statement (read it here) was notably combative and provided no room for any other outcome – this would be a hearing where Chair Gensler’s agency would be under attack by the Republican caucus, at the very least.
Chair McHenry concluded that he was on the verge of issuing a subpoena for the lack of response by Chair Gensler to many requests for information -mainly by the Committee’s Republicans.
Ranking Member Rep. Maxine Waters (D, CA) chose to talk about the government shutdown and the failure she saw with the Republican caucus at the beginning of her statement. She saw the SEC being undermined by Republicans in spite of the fact she believed Gensler was doing “exactly the job that the American people want.” She added, “You’re moving thoughtfully and effectively.” Waters claimed that Democratic colleagues supported Gensler.
Rep. Ann Wagner (R, MO) and Rep. Brad Sherman (D, CA) each offered a predictable one-minute speech reflecting what the leaders of both parties on the Committee had already said.
Next up, Chair Gensler offered his prepared opening statement (read it) echoing high-minded themes around innovation and updating rules for the 2020s. He also defended rulemakings and comment periods saying that public feedback has been an important part of the mix. Then, Chair Gensler brought up the impact of the shutdown which implicated the Republicans of the Committee.
Q&A
Chair McHenry led with a question on Bitcoin and whether its a commodity. Chair Gensler eventually said it was not a security – still resisting saying the word “commodity.” But, it seemed he had admitted that Bitcoin was, in fact, a commodity in that it didn’t meet the strictures of the Howey test.
On the SEC’s lack of response to Committee letters – driven mostly by Republicans – requesting information of various kinds, Gensler mostly said that he had complied. McHenry wasn’t buying it.
Ranking Member Waters ran with “mass non-compliance” at the beginning of her questions and brought up the failure of FTX. She asked about SEC’s actions in the crypto space. Predictably, Gensler agreed with Ranking Member Waters and referenced some rulemakings and cases that SEC had recently undertaken. Waters re-emphasized the impact of the government shutdown on the SEC in her questions as Democrats clearly were laying the blame at the feet of Republicans with the electorate watching.
Rep. French Hill (R, AR) brought up equity market structure concerns from a bipartisan group of committee members – criticism included failing to do an effective cost-benefit analysis.
Rep. Brad Sherman (D, CA) was next and expressed disagreement with Gensler on several financial industry rule-makings by the SEC.
In general, Gensler was pummeled by both sides of the aisle across a range of financial industry issues – predictably by Republicans, but also tough questioning from many Democrats with the exception of Democratic leaders such as Ranking Member Waters, Rep. Stephen Lynch (D, MA) and Rep. David Scott (D, SC), who is an HFS member and also Ranking Member of House Agriculture.
In some ways, the pummeling was nothing new as Rep. Jim Himes (D, CT) noted later, “The SEC is a whipping boy.”
Rep. Wagner took her Q&A time to reference comments years ago by Chair Gensler about the power of technology. But, she said, SEC version of Chair Gensler is the exact opposite and anti-technology. Gensler, predictably, said they’re the same person and explained why.
It was over an hour until digital assets was mentioned again in the hearing. House Majority Whip Rep. Tom Emmer (R, MN) delivered a line of questions which suggested that Chair Gensler was bank-friendly and was pushing “regulation by harassment” on the American people. Gensler disputed Emmer’s assertions and repeated his belief about crypto being “rife” with malfeasance. Later, Rep. Emmer issued a statement about his interaction with the Chair – see it here.
Next up, Rep. Josh Gottheimer (D, NJ) brought up the bipartisan support for the digital asset market structure bill. H.R. 4763, the “Financial Innovation and Technology for the 21st Century Act.” Gottheimer had been among those voting to pass the legislation out of the HFS committee. Gottheimer didn’t press Chair Gensler, but the difference in opinion on the need for regulation in crypto markets was stark.
Rep. Torres
Rep. Ritchie Torres (D, NY) began his 5-minutes with Chair Gensler by exploring the phrase “investment contract” and the Howey test. This was the most combative of all interactions with the Committees’ Democrats. Torres continued a line of questions which progressively put Chair Gensler on his heels around the efficacy of the Chair’s position on digital assets and used Pokemon to drive home his point.
Here’s a lightly edited transcript of the “Pokemon” part of their exchange:
Rep. Torres: “Suppose I were to purchase a Pokemon card, would doing so constitute a security transaction?”
Chair Gensler: “You can purchase a Pokemon card.. I don’t know what the context is.”
Rep. Torres: “But purchasing a Pokemon card, is that a securities transaction?”
Chair Gensler: “That’s not a security.”
Rep. Torres: “O.K. If I were to purchase a tokenized Pokemon card on a digital exchange via a blockchain, is that a security transaction?”
Chair Gensler: “I’d have to know more.”
Rep. Torres:” OK, so for you the process of tokenization is what transforms a non-security transaction into a security transaction? I thought you were technology neutral?”
Gensler: “If the investing public is anticipating profits based upon the efforts of others and they’re exchanging funds, that’s the core…”
Torres: “… my time has expired.”
So…. for the SEC, tokenization is what makes an asset a security was the implication of the Torres-Gensler discussion.
more Q&A
Rep. Warren Davidson (R, OH) predictably took issue with the Chair’s “arbitrary and capricious” actions including those ihn digital assets – such as the lack of approval of a Bitcoin spot ETF. He promoted his SEC Stabilization Act [H.R. 4019] which would remove the Chair role from the SEC and add a sixth commissioner.
Rep. John Rose (R, TN) brought the need for regulatory guidance in digital assets with Chair Gensler repeating his previous views about an industry “rife” with non-compliance.
Rep. Wiley Nickel (D, NC) brought up his letter to the Chair about approving the Grayscale ETF conversion to a Bitcoin spot market ETF. Gensler would only say that the SEC is considering the Court’s decision even though, as Nickel pointed out, the Court was unequivocal about the SEC’s position: it was unsupportable.
Rep. Flood
Rep. Flood brought up SAB 121 and took issue with the thinking behind the accounting and disclosure rules around the custody of digital assets. As it turned out, Rep. Flood had just announced new legislation apparently rescinding the rules of SAB 121 called the “Uniform Treatment of Custodial Assets Act.” Once again, Democratic Reps. Ritchie Torres and Nickel joined Flood along with Rep. Hill. According to the release, “The bill would prohibit certain federal agencies from requiring certain institutions to include assets held in custody as a liability, and for other purposes.” Read it.
Flood said at the conclusion of his hearing time: “In April, you said you wanted the SEC ‘stay in our lane’ with regard to SAB 121’s potential effects on a bank’s balance sheet. It’s fair to say, that the fact pattern we have is, that the SEC is not just going ‘out of its lane,’ but it failed to comprehend the existence of any conflict with Prudential rules.”
still more questions
Rep. Lynch took his 5-minutes to discuss digital assets. Lynch brought up the recent Ripple lawsuit decision expressing his dissatisfaction with the decision. Gensler could not comment. Lynch went on to suggest that the digital asset market structure could hurt consumers and tried to get Chair Gensler to talk about it. He did not want to talk about the legislation directly but suggested commingling is at the center of any question about rules for digital assets.
Rep. Ralph Norman (R, SC) brought up Prometheum which has been a hot button issues for Republicans ever since the company’s CEO appeared at a witness at a House Financial Services hearing in June. Norman equated the company’s presence as a potential national security threat given it’s minority ownership.
Rep. Al Green (D, TX) supported the Chair’s position on digital assets and spent his time walking through the Chair’s opinion on digital assets, recent actions and digital assets impact on minority communities.
Before he adjourned the hearing, Chair McHenry reminded Chair Gensler that he expected substantive answers to questions posed by HFS members in recent letters. Otherwise, McHenry would use a subpoena, he said.