SEC Gensler at Senate Hearing
September 18, 2023
SEC Chair Gary Gensler testified before the Senate Banking Committee, where he fielded questions on a variety of issues, including private equity and hedge funds, climate disclosures, crypto, and artificial intelligence. Gensler will appear next on the House side on September 27.
Why it matters: Gensler’s aggressive and expansive agenda continues to draw bipartisan criticism, but he also has his defenders. Banking Committee Chairman Sherrod Brown (D-OH) praised Gensler’s actions, including the SEC moving to implement the Conflicts of Interest in Securitization rule.
What they’re saying: The SEC’s broad jurisdiction over the economy leaves room for many topics, the recently final Private Funds Rule, the soon-expected Climate Disclosures, cryptocurrency, and AI were repeated topics.
Private funds rule
- Republicans heavily criticized the agency’s private funds rule, which Ranking Member Scott (R-SC) characterized as a “tax” on private markets that will hurt small businesses and push small and diverse fund managers out of the market. Sen. Hagerty (R-TN) insinuated that the actual purpose of the proposal is to change the negotiated dynamics between two sophisticated players in favor one over the other.
- In contrast, Sen. Brown welcomed efforts to fix this power imbalance, highlighting that private equity firms managed trillions in assets for pension funds and endowments last year, controlled between 15% and 20% of the whole economy, and they were able to do so without offering much information on how they’re using people’s money, including around fees, comparable performance data, independent audits, and conflicts of interest disclosures.
- Brown asked how providing this information will help protect pension funds, charitable endowments, and other investors. Gensler responded that the rules bring greater transparency about fees, performance, and side letters, which will help promote competition and efficiency in the market. “If the cost comes down, that means the returns for retirees goes up,” he added.
Climate disclosures
- Gensler stated that the SEC isn’t a “climate regulator” three separate times, while also noting that 80% of the top 1,000 companies by market cap already make climate risk disclosures: “We’re just trying to bring some comparability to that,” he said.
- Sen. Brown agreed that the majority of the largest companies already disclose GHG emissions on a voluntary basis because investors demand it; however, without a clear standard, the information is not easily digestible nor comparable across companies, he said. Gensler reiterated that the proposal is about bringing comparability and consistency to climate disclosures, adding that they “try not to do things against the clock.” It depends when the staff and Commission are ready, he concluded.
- Across the aisle, Ranking Member Scott emphasized that the compliance burdens associated with the new rules will quadruple the cost of running a public company. On a related note, Sen. Tester (D-MT) sought assurances that the climate rule won’t lead to additional “pain in the neck” for agricultural producers, saying that the “bleed down of regulation” happens often and he wants the agency to make crystal clear that farmers and ranchers won’t have to report on goods they sold at public companies.
- In response to Sen. Tester’s question on what SEC envisions Scope 3 reporting to look like, Gensler admitted that Scope 3 requirements are not as well developed as Scope 1 and 2, given that public companies currently report some GHG emissions, though the SEC is assessing an appropriate path forward.
Artificial Intelligence
- Democrats focused on specific AI applications and emerging risks, with Chair Brown previewing a hearing in the coming weeks on the impact of AI on financial markets and consumers.
- Chair Gensler answered that predictive data analytics and AI are used today in robo advising, in brokerage apps, for market sentiment analysis, on account opening documentation, to submit insurance claims, to assist with AML compliance, etc.
- Sen. Warner (D-VA) expressed that AI could undermine public trust in our capital markets and in our free and fair elections, mentioning deepfakes and how AI tools can generate false complaints about products or false regulatory filings.
- Ranking Member Scott slammed the SEC’s new rules around conflicts of interests associated with the use of AI by broker-dealers—despite being labeled as an “AI” rule, this “power grab” will stifle innovation, he said.
- Sen. Cortez Masto (D-NV) asked if trading firms and money managers, in addition to broker-dealers and investment advisers, should be required to disclose their use of the technology. Chair Gensler responded that, given the new challenges posed by AI, the lack of explainability, and the chance for biases in AI models, Congress may want to take up such disclosures.
The bottom line: The SEC will continue to be in the spotlight with several hearings over in the House next week. Contact David McCarthy (dmccarthy@crefc.org) with questions about Congress’s oversight of the SEC.