Gensler will be pressed almost immediately to deal with growing issues surrounding SPACs along with longer-range policy choices on climate risk disclosures and digital asset securities.
The Senate has confirmed Gary Gensler to be the next permanent chair of the SEC by a vote of 53-45. Gensler, like former SEC Chair Mary Schapiro before him, once was chair of the CFTC, which is why very few members of the Senate Banking Committee doubted his credentials to lead the SEC during his confirmation hearing and instead voiced their support or opposition to him based on what they perceived to be Gensler’s likely policy directions once he takes on the role of SEC chair. Gensler faces some immediately pressing issues regarding special purpose acquisition companies (SPACs) and a range of longer-term policy decisions that could move the SEC closer to issuing updated guidance on climate risk disclosures and potentially a freshened approach to digital asset securities. It is unclear exactly when Gensler will be sworn in as SEC chair, but there is typically a lag of several days between Senate confirmation and when a swearing in ceremony takes place.
The Senate’s confirmation vote, however, leaves open the question of Gensler’s serving an additional full term. Specifically, today’s vote was only for Gensler to finish the remaining months of former SEC Chair Jay Clayton’s term, which ends June 5, 2021. The Senate Banking Committee had reported Gensler’s nomination for both the remainder of Clayton’s term and for an additional full term to end June 5, 2026. The holding of multiple Senate votes to confirm an SEC chair is not without precedent. For example, it happened in 2013 regarding former SEC Chair Mary Jo White, who was initially confirmed only to finish her predecessor’s term and then later to an additional full term (White was confirmed by voice vote on April 8, 2013 for the term expiring June 5, 2014, and then confirmed again by voice vote on August 1, 2013 for a term expiring June 5, 2019).
Regulators welcome Gensler, industry cautious. Acting SEC Chair Allison Herren Lee and fellow commissioners Hester Peirce, Elad Roisman, and Caroline Crenshaw jointly issued a public statement shortly after the Senate’s vote welcoming Gensler to the SEC. Said the Commissioners: "He will be joining a dedicated staff that works tirelessly day in and day out on behalf of investors and our markets. We welcome him back to public service and look forward to working together to execute our vital mission."
Robert W. Cook, President and CEO of the Financial Industry Regulatory Authority, Inc. likewise issued a statement in which he anticipated working with Gensler: "Chairman Gensler brings to the Commission an outstanding record of public service, deep expertise in the functioning of our capital markets, and consistent advocacy for the interests of investors. We look forward to working with Chairman Gensler to advance our shared mission of protecting investors and ensuring market integrity."
By contrast, the several industry groups that had commented on Gensler’s confirmation were somewhat cautious in their praise. Securities Industry and Financial Markets Association president Kenneth E. Bentsen, Jr. emphasized Gensler’s "deep industry and policy experience." Walt Lukken, FIA President and CEO, whose organization would have known Gensler better when he was CFTC chair, remarked that Gensler "is an experienced regulator who will bring a wealth of knowledge to a challenging set of issues before the SEC and the financial industry."
Senate support bipartisan. Gensler’s qualifications for the role of SEC chair were never in doubt throughout the confirmation process and both the committee vote and final confirmation vote reflected at least some bipartisan support for Gensler. For example, despite Republicans’ nearly unanimous opposition to Gensler, two Republicans, Sen. Cynthia Lummis (R-Wyo) and Sen. Mike Rounds (R-SD), voted to advance Gensler’s nomination out of the Senate Banking Committee, resulting in a favorable committee vote of 14-10 (under a power sharing agreement, Senate committees currently have equal numbers of Democrat and Republican members). Lummis had asked Gensler at his hearing about climate change and digital assets; Rounds also had asked Gensler about the possibility that virtual currency issuers might take their business overseas absent SEC clarity on digital assets.
Lummis, along with Sens. Susan Collins (R-Me) and Chuck Grassley (R-Iowa), also voted with all of the Democrat Senators to confirm Gensler, yielding a 53-45 final vote tally. Rounds did not vote on either the cloture motion to end Senate debate on Gensler’s nomination or on the final vote to confirm Gensler.
Senate Banking Committee Chair Sherrod Brown (D-Ohio) told Senators that Gensler will uphold the SEC’s mission and ensure a strong enforcement program. Brown also emphasized the need for the SEC to not overlook middle class Americans. Brown issued press releases supporting Gensler before and after the full Senate’s vote.
"He will lead the SEC at a time when it has become more and more obvious to more and more people that the stock market is detached from the reality of working families’ lives," said Brown. "Mr. Gensler will bring the SEC’s focus back to the people who make this country work. He will push to ensure that markets are a way for families to save and invest for their children’s education, for a downpayment on a home, for a secure retirement, not a game for hedge fund managers, where workers lose every single time."
Ranking Member Patrick Toomey (R-Pa) had emphasized during Gensler’s confirmation hearing that he worried Gensler would push the SEC to engage in regulatory detours beyond the agency’s historically financial regulatory role. During the hearing, Toomey posed a hypothetical in which he asked if it would be material to know about a company’s spending on renewable forms of energy when that company spends little overall on electricity. Gensler agreed that materiality is key and that he would consider the economic aspects of materiality. Specifically, Gensler said materiality depends on the total mix of information such that a small item must be considered in context. Toomey continued the hypothetical, suggesting that the small nature of an expenditure would be per se nonmaterial. Gensler replied that recently many investors had, via proxy votes, made it clear that this kind of information is material.
On the Senate floor, Toomey recently reiterated his concerns. "Let me acknowledge that Mr. Gensler, without a doubt, has a great deal of knowledge and experience in our securities markets. There is no question about it. He has a lot of expertise there," said Toomey. "But based on his record as a regulator in the past and statements that he has made during the course of this nomination process, I am concerned that he will use the SEC and its regulatory powers to advance an agenda that should not be the purview of the SEC—specifically, global warming and climate change, political spending disclosures, and issues of racial inequality and diversity."
Much as Brown had done, Toomey also condensed his remarks in press release form.
Lee set the stage for Gensler. With the confirmation of Gensler, the SEC will soon have the three vote majority necessary to take regulatory action beyond the issuance of staff guidance and commissioners’ public statements on particular topics. A key question will be whether Gensler will keep key personnel in place that Acting Chair Lee has hired (e.g., the former academic John Coates, whom Lee appointed Acting Director of the Division of Corporation Finance). Gensler also will have the chance to reconsider guidance put in place by Lee on a range of topics.
For example, SPACs have drawn increasing scrutiny by the SEC over their accounting methods and public misperceptions about SPACs’ potential liability under federal securities laws. The latest guidance has come in the form of public statements by Coates and Acting Chief Accountant Paul Munter (See, e.g., Coates and Munter regarding accounting treatment of warrants and accounting restatements related to SPACs; Coates regarding SPACs’ liability; Munter regarding auditing concerns; and CorpFin guidance on more general topics regarding SPACs).
With respect to SEC enforcement, Lee announced that the Enforcement Division will cease recommending to the Commission any settlement offer that is conditioned on the grating of a bad actor or well-known seasoned issuer (WKSI) waiver. Lee also announced that senior division officers will once again be able to approve a formal order of investigation, which means that senior division officers will be able to subpoena documents and take sworn testimony.
Climate risk disclosure also has received significant treatment from Acting Chair Lee and the other commissioners during the past several months. Lee announced in February that she had directed CorpFin to review companies’ disclosures for compliance with the SEC’s 2010 on climate risk disclosure.
At the Northwestern University Pritzker School of Law’s 2021 Securities Regulation Institute in January, several former CorpFin directors noted the likelihood that SEC staff could review companies filings on climate risk and that companies may be wise to make their disclosures more robust in advance of such staff review. Moreover, other countries may provide impetus to the US. doing something more on climate risk disclosure, although it is unclear if the U.S. Congress or the SEC would or could do anything as ambitious as New Zealand may under legislation proposed there.
The SEC also has begun to untangle the events of late January and early February when GameStop and several other stocks experienced extreme market volatility supposedly fueled by social media "memes." The SEC issued a series of statements reassuring markets that the agency would do its part to ensure the integrity of U.S. markets.
Lastly, the SEC has taken little policy action on digital asset securities since the Biden Administration came into office. That may change under Gensler, who will inherit the SEC’s enforcement action against Ripple Labs, Inc. and who comes to the SEC with a substantial background in digital assets. Gensler also is likely to be pressed to approve virtual currency-themed exchange-traded products. Panelists at securities conferences during the early part of 2021, however, have cautioned that Gensler’s deep knowledge of the subject may not necessarily equate with a more relaxed SEC policy. The one thing Gensler might do to the satisfaction of a large swath of participants in digital asset markets could be to re-state and update existing SEC policy into a single integrated set of guidance or regulations that bring clarity to the field.
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