The last time Gary Gensler ran an American financial regulator, he was charged with cleaning up the mess left by the 2008 crash. Now the new chair of the US Securities and Exchange Commission faces a rather different task: policing volatile and frothy markets that may be hiding all kinds of misbehaviour.
Frenzied dealmaking and trading, cheap financing and hybrid working have created a perfect storm of opportunities for fraudsters. The pressure is on Gensler and his enforcement chief Alex Oh to clamp down and deflate any bubbles before they burst.
They take over an SEC that is struggling with homeworking, and overwhelmed with new filings for initial public offerings and special acquisition companies known as Spacs. It is also under fire from critics who say that the previous chair Jay Clayton’s focus on Main Street investors left Wall Street dangerously unfettered. Total enforcement cases dropped to a six-year low in the 2020 fiscal year, although the SEC collected a record $4.7bn in remedies.
At worst, we could see a repeat of 2001, when the dotcom bust revealed monstrous accounting and Wall Street scandals that undermined public confidence. Then-SEC chair, Harvey Pitt, a financial industry lawyer, was slow to address public anger, which ultimately cost him the job.
Gensler, who started his career at Goldman Sachs, is unlikely to make the same mistake. While chair of the smaller Commodity Futures Trading Commission, he was routinely described as “aggressive” and “hated” as he pushed through post-crisis rules and forced big banks to cough up billions for rigging foreign exchange benchmarks and the bank funding rate Libor.
“Gary got the job for a number of reasons, one undoubtedly being to lead a robust enforcement programme with impact. Based on my time working for him, I expect he is going to do just that,” says David Meister, former CFTC enforcement director.
The choice of Oh reinforces the sense that Gensler will play hardball. As a securities fraud prosecutor, she had an uncompromising approach to settlement negotiations. “This is not a crowd with a sense of humour and they are going to be very aggressive,” says one defence lawyer. “They are out looking for problems rather than having them land on their doorstep.”
Still, it is vital their pugnaciousness is channelled in the right direction. If the SEC oversteps, it could end up with court losses that curtail its powers. Just look at the Federal Trade Commission: last week, the Supreme Court unanimously slashed its ability to seek cash redress from companies.
So what will they do first? After Gensler was selected, but before his confirmation, the SEC took three notable steps: it freed up more staff to send subpoenas without having to ask permission from higher ups; sent Wall Street firms a broad request for information about Spacs; and set up a task force aimed at sniffing out companies that are misleading investors about their environmental, social and governance impact.
Looser subpoena rules are typically used by (mostly Democratic) SEC chairs to embolden staff and signal that the agency is on the prowl. On Spacs, they’ll be looking for undisclosed conflicts of interest among the banks, private equity firms and celebrities who are bringing these blank-cheque vehicles to market. They will also be running a microscope over the promises Spacs make when they later merge with private companies.
If the SEC finds signs that the banks and sponsors were using financial projections they did not believe or failed to check, it could bring cases like those that saw Wall Street banks pay billions for misleading investors about dotcom IPOs. Finding ESG violations could be hard, as there are no specific disclosure rules. When New York state enforcers brought a climate claim against ExxonMobil in 2019, they lost badly.
Still, don’t expect the SEC to stop there. The frenzy around GameStop and other meme stocks has raised concerns that trading apps such as Robinhood are mistreating small customers. A new rule requiring brokers to act in customers’ best interest needs enforcing. And the Archegos collapse, which cost big banks more than $10bn, points to a need to puncture the secrecy around family offices and the derivatives that they use.
These problems may lead to tighter regulation. But crafting a measured response takes time. High profile, big-dollar enforcement cases are a quicker way to change behaviour. Look for Gensler to exploit that to the full.
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