Today’s hearing of the House Financial Services (HFS) Committee hearing on Oversight of the Securities and Exchange Commission (SEC) started before it began as the Committee’s Republicans led by Chair Patrick McHenry (R, NC) fired off a condemnation of SEC Chair Gary Gensler’s handling of digital assets in advance of the hearing’s start.
See the letter (PDF). And, see the accompanying press release.
In the letter, HFS Republicans called out Chair Gensler for misrepresenting his agency’s willingness to perform registration of digital asset companies. “You have been outspoken in your push for digital asset trading platforms to ‘come in and register’ under the national securities exchange (NSE) framework. Yet, at the same time, you have failed to provide a path that allows digital asset trading platforms to register.” With HFS Committee member Rep. Warren Davidson (R, OH) already threatening Gensler on Twitter with the loss of his job through a new, yet-unseen bill that would restructure the SEC, the stage was set for a combative meeting between HFS Republicans and Chair Gensler.
opening statements
As the hearing began, Chair McHenry called the meeting to order and began with his opening statement (read it) criticizing the SEC Chair on his digital assets “regulation by enforcement” agenda. He also noted that rule-making by the SEC had doubled under Gensler’s leadership. And he concluded with a condemnation of Gensler’s lack of response to Congressional Republicans requests of the SEC for information related to FTX and other issues. .
In her opening statement, Ranking Member Rep. Maxine Waters (D, CA) wasted no time in her opening statement (read it) in defense of Chair Gensler and called the investigations by Republicans as a “sham.” She blamed Republicans for alignment with Wall Street interests and the rejection of climate change rules for investing, hedge fund reforms and what she called deregulation. She applauded Chair Gensler for his strong enforcement of securities laws as it related to crypto.
Next up were Rep. Ann Wagner (R, MO) and Rep. Brad Sherman (D, CA) took brief turns on the far ends of criticism and compliments of Chair Gensler, respectively.
In his opening remarks, Chair Gary Gensler pivoted off a tweet he had carefully made before the hearing with the statue of lawmaker Sam Rayburn in the Rayburn House Office Building. He argued that artificial intelligence (AI) and not crypto was a more important topic as he looked ahead at his purview at the SEC, suggesting roboadvisors will be transformed to name a few of the impacts. The markets should serve investors not the other way around, he said.
See Chair Gary Gensler’s prepared testimony on the SEC website.
Q&A
HFS Chair McHenry began the question and answer of Gensler around whether Ether was a commodity or a security. Gensler never answered directly as much as Chair McHenry tried even if he did not seem very surprised.
Ranking Member Rep. Waters asked Gensler to explain to Chair McHenry how a security is defined. He indicated it’s a four-part test and provided some detail. Rep. Waters asked if Gensler had the framework he needed to bring crypto into compliance. Unsurprisingly, Gensler said he has what he needs. “I’ve never seen a field (crypto) that is so non-compliant,” said Gensler.
Rep. Hill
Rep. French Hill (R, AR), who is Chair of the Subcommittee on Digital Assets, Financial Technology and Inclusion, followed up on McHenry’s questioning and in a prelude to tomorrow’s hearing about stablecoins on his subcommittee, he asked Gensler’s position on “payment stablecoins.”
Gensler grudgingly admitted he would support a framework, but didn’t say anything new that would indicate Gensler changed his mind on anything crypto-related such as stablecoins. Even though he admitted understanding the President’s Working Group recommendation to allow Congress to create a stablecoin framework, Gensler seemed to contradict himself by saying it was OK that stablecoin legislation has not been offered by Congress, yet.
Rep. Velasquez
Silicon Valley Bank, the recent bank crisis, insider selling and executive compensation was the focus of Rep. Nydia Velasquez (D, NY) questioning. She asked what Gensler was doing about the apparent iniquity. This was the first time in the hearing that a Democrat put some heat on Gensler who pointed to initiatives his agency undertaken.
Rep. Sessions
Rep. Pete Sessions (R, TX) told Chair Gensler that he has sent a letter to the SEC to try to overcome what he has seen as stonewalling.
Rep. Sherman
“All intangible assets are securities,” was an idea floated by Rep. Brad Sherman (D, CA) to Chair Gensler in his 5-minutes of questions. He also suggested that accredited investor laws were out-of-date. Sherman teed up Gensler on his non-compliance of crypto position.
Rep. Lucas
Securities-based SWAPs was the topic for Rep. Frank Lucas (R, OK). Lucas tone began as the most amiable among Republicans as he publicly noted Gensler’s previous work at the CFTC and his involvement with Lucas. Nevertheless, overly ambitious rule-making was the criticism of Rep. Lucas of Chair Gensler and the SEC.
Rep. Lynch
Rep. Stephen Lynch (D, MA), who is Ranking Member of the Digital Assets Subcommittee, asked about the 130 enforcement actions that the SEC had undertaken and its success rate. Gensler suggested in so many works that most had been either decided or settled in the SEC’s favor.
Rep. Lynch brought up the early January guidance by banking regulators of crypto assets and banks. Gensler said it isn’t about lack of clarity, the field “in the main” has chosen to be non-compliant, he said. He claimed, as before, it could undermine the $100 trillion capital markets.
“Crypto firms offer an amalgam of services,” said Lynch and ultimately noted what he said was a “commingling” of funds. He asked Gensler to comment on it which he did so willingly.
Rep. Posey
Rep. Bill Posey (R, FL) asked about Gensler and whether he and the agency looked into FTX. Gensler said they filed an action against FTX founder and CEO Sam Bankman-Fried, but didn’t pinpoint when he believed FTX was a problem.
On the high attrition rate among employees at the Securities Exchange Commission, Chair Gensler noted that they needed more resources for digital assets.
Rep. Cleaver
Rep. Emanuel Cleaver (D, MO) used his time to talk about a timetable for raising the current debt ceiling and the impact of any possible delay. Gensler said it would undermine the base of U.S. capital markets, particularly U.S. treasuries.
Rep. Luetkemeyer
Rep. Blaine Luetkemeyer (R, MO) brought up the SEC’s ESG initiative, moved on to a question on mortgage loans and then social media’s impact on recent bank runs where short-selling might be in play.
Rep. Himes
Rep. Jim Himes (D, CT), a known, pro-crypto Democrat, started his time with Chair Gensler on the recent banking crisis and made the point that Gensler had never rejected a hearing with the Republican-controlled House Financial Services Committee. He asked Gensler about regulatory arbitrage between public and private markets. Gensler said both markets have a role to play.
Rep. Huizenga
Rep. Bill Huizenga (R, MI), who is Chairman of the Oversight and Investigations Subcommittee on the House Financial Services Committee, started his questions on ESG disclosure rules and the SEC and what he saw as inadequate responses from the Securities and Exchange Commission to Congressional requests. On the FTX letter information request (the original HFS letter), Rep. Huizenga said that the SEC did not send anything to the Committee.
Rep. Beatty
Rep. Joyce Beatty (D, OH) concentrated her time on ESG and its impact small business. Gensler expounded on the importance of climate-related disclosure whether it has to do with supply chains or otherwise. In the final 30-seconds of her time, Gensler called out Circle and its de-pegging during the banking crisis.
Rep. Wagner
Rep. Ann Wagner (R, MO) chose to use her time in part to question Chair Gensler to talk about “best execution rules.”
Rep. Casten
Rep. Sean Casten (D, IL) concentrated on the importance of addressing climate change through disclosure rules by the SEC. “Information asymmetry” was the reason for the rules – in order to protect investors said Gensler.
Rep. Barr
Rep. Andy Barr (R, KY) brought up Staff Accounting Bulletin 121 which moved custody services of digital assets to the balance sheet for public companies – thereby inhibiting the growth of digital assets. Gensler said he was proud of the change effected by SAB 121. Barr inferred that investors were exposed, in part, to the fraud of FTX because there were no good options with highly-regulated banks due to onerous accounting rules related to crypto and banks.
Rep. Pressley
Using her time to discuss “climate risk” and “big oil,” Rep. Ayanna Pressley (D, MA) made the point about the necessity for ESG disclosure rules being implemented by the SEC.
Rep. Williams
Rep. Roger Williams (R, TX) saw the ESG rules as harming small business. Chair Gensler emphasized that the SEC is “not a climate regulator.”
Rep. Foster
Rep. Bill Foster (D, IL) expressed a concern around an overload on SEC staff and understanding how rule-makings will affect markets. He advocated pilot programs. He also advocated a technical, “open source” approach for understanding compliance to order execution rules. Foster, who was co-chair of the Congressional Blockchain Caucus in the 117th Congress, asked a question in relation to digital assets regarding identity but ran out of time.
Rep. Emmer
Rep. Tom Emmer (R, MN), the Majority Whip, asked Gensler to respond to a series of questions which progressively tried to make the case for overreach by the SEC as well as a lackadaisical approach to the implosions of Terra Luna and FTX. “Your public statements are not regulations,” said Emmer.
Berating Chair Gensler on his positions on digital assets, Rep. Emmer said Gensler had been “an incompetent cop on the beat” and expressed concerns that the Chinese Communist Party was taking advantage of the situation.
Rep. Gottheimer
Rep. Josh Gottheimer (D, NJ) admitted that some rulemaking related to climate disclosures may protect investors but also wasn’t taking in enough comment from the public. Gottheimer said he was concerned about a lack of formal guidance on digital assets – the first digital assets criticism by a Democrat of Chair Gary Gensler.
Gottheimer: “I’ve pushed this committee and financial regulators to create smart guardrails for digital assets. You’ve repeatedly claimed that most cryptocurrencies are covered by existing securities law and despite that belief, the commission has issued little formal guidance to facilitate digital asset firms compliance with existing rules. SEC on your leadership has largely used enforcement actions to spur compliance. I’m concerned the lack of formal guidance through the normal rulemaking processes for even more uncertainty in the space, ordinary global leadership in financial technology and putting consumers at risks and further enabling bad actors.”
Gensler noted his support of Secretary Yellen’s initiative around stablecoins.
Rep. Loudermilk
Rep. Barry Loudermilk (R, GA) expressed concerns among many that the use of blockchain technology was inhibited by the SEC Chair’s position.
Rep. Meeks
Rep. Gregory Meeks (D, NY) concentrated his time on rule-making around diversity, equity and inclusion (DEI) and expressed interest in the SEC’s seeking comment on DEI and “human capital rule-making.”
Rep. Mooney
Rep. Alex Mooney (R, WV) brought up climate disclosure rules for “naming and shaming fossil fuel companies.” Gensler defended his agency’s rule-makings and emphasized the importance of investor protections.
Rep. Torres
Rep. Ritchie Torres (D, NY) questioned Chair Gensler about the lack of sensitivity to what he saw as the true problems of crypto malfeasance – offshore companies i.e. FTX. Conversely, onshore companies who are under the compliance umbrella of U.S. securities and commodities laws have been targeted by the SEC. Gensler admitted that the SEC has enforcement authority to go after offshore crypto companies but it takes longer in time.
Rep. Davidson
Rep. Warren Davidson (R, OH) was the most combative of all questioners and began by questioning whether Senator Elizabeth Warren (D, MA) had helped with answers prior to the hearing. Chair Gensler did not address the question directly. Rep. Davidson moved on to how Coinbase had been selling unregistered securities and Kim Kardashian had been promoting unregistered securities. Davidson questioned on why Gensler wasn’t shutting down the actual securities.
Davidson concluded that he was introducing legislation to remove the SEC Chair and create a new structure within the Securities and Exchange Commission. Davidson said, “I’m introducing legislation that removes the chairman of the Securities and Exchange Commission and replaces the role with an executive director that reports to the board where all authority would reside. Former chairs of the SEC will be ineligible under my proposed bill. And this isn’t just my take, it resonates across the political spectrum. The American people want democratic access to capital, retail investor participation. You can’t just exclude retail investors from markets and claimants for their own good. Our markets need to function and flourish.”
Rep. Garcia
Rep. Sylvia Garcia (D, TX) addressed financial literacy. She noted the lack of financial literacy in Texas particularly among the Spanish-speaking population.
Rep. Rose
Rep. John Rose (R, TN) encouraged Chair Gensler to come to the Hill more. Gensler welcomed the idea, he said. Rep. Rose questioned the need for certain ESG-related regulations which could particularly impact small businesses.
Rep. Nickel
Freshman Congressman Rep. Wiley Nickel (D, NC) talked about a new bill on e-delivery of investor communications and information he had coordinated with Rep. Huizenga. Chair Gensler said his agency will implement it if it’s passed and signed by the President and supported the idea of electronic delivery. Equity market structure rule-making was a concern for Rep. Nickel such as commission-free trading that could go away. Gensler said zero-commission did not mean zero cost and that “best execution” remains important. Wiley encouraged the SEC Chair to engage with Congress and the public.
Rep. Steil
Rep. Bryan Steil (R, WI) inquired about whether Chair Gensler had used outside emails. He said he did not. Rep. Steil pointed out that none of the SEC including the Chair own crypto. Gensler seemed to admit he has never owned crypto – even beyond his tenure at the SEC.
Rep. Pettersen
Rep. Brittany Pettersen (D, CO) spent her time asking about investor education and what the SEC is doing to grow it. She was impressed with all the current tools that are available on the SEC website, but was critical of a short comment period for investors on rule changes by the SEC. Chair Gensler noted that reforms to the stock market structure included a 3-month period.
Rep. Timmons
Rep. William Timmons (R, SC) questioned how front-running rules by the SEC could protect retail investors. Third-party investor due diligence was also a part of Rep. Timmons line of questioning. Finally, Rep. Timmons brought up the US dollar as the world’s reserve currency.
Rep. Horsford
Current capital formation and fairness maintained by the SEC was complimented by Rep. Steven Horsford (D, NV), but he was concerned about a “two-tier system” as it related to investors in his district. Chair Gensler discussed order execution and retirement plans.
Rep. Meuser
Rep. Dan Meuser (R, NY) brought up that Gensler was the CFO of Hilary Clinton presidential campaign. The Congressman suggested that Gensler was interfering in S4 and SPAC compliance. Rep. Meuser suggested a potential conflict of interest by Gensler in a particular pending transaction.
Rep. Tlaib
Rep. Rashida Tlaib (D, MI) talked about Scope 3 emissions and asked for a definition. Gensler obliged. Rep. Tlaib expressed concern that the rules were too permissive for corporations regarding emissions.
Rep. Fitzgerald
Rep. Scott Fitzgerald (R, WI) asked about private mortgage insurance.
Rep. Vargas
Rep. Juan Vargas (D, CA) asked to expound on why Chair Gensler thinks AI will be so transformative. Gensler said he agreed that AI will be a big challenge for under-served communities.
Rep. Kim
Rep. Young Kim (R, CA) was critical of rules around placing market orders. Gensler said the rules are there to protect those investors – her constituency’s investors.
Rep. Green
Rep. Al Green (D, TX) said the hearing should be about the country’s willingness to pay its debts and its impact, among other things, on the US dollar as the world’s reserve currency. He asked Gensler about the impact of not raising the debt ceiling who responded that the impact could be severe.
After 3 hours and 45 minutes of testimony, Chair McHenry moved the hearing to recess in order to let Members vote on the House floor.