By Dennis Kelleher, Co-founder, President and CEO of Better Markets
(The op-ed originally appeared in the Financial Times—condensed for length and subscription required. The complete op-ed is below.)
Gary Gensler, the former Chairman of the Commodity Futures Trading Commission (CFTC) and former partner at Goldman Sachs, was sworn into office Saturday, April 17, 2021, as the new Chairman of the Securities and Exchange Commission (SEC). The SEC’s mission is to protect investors; facilitate capital formation; promote fair, orderly, and efficient markets; and strengthen financial system resilience and stability.
To fulfill the agency’s mission, Chairman Gensler will have to tackle multiple, complex issues simultaneously. Those issues fall into five categories: remedying Trump’s deregulation, completing the unfinished Dodd-Frank rulemakings, going beyond Dodd-Frank to implement other long-overdue reforms, instituting Biden administration priorities, and addressing regulatory gaps exposed by new developments.
First, the Trump administration’s deregulation has exposed investors to predators, markets to manipulators, and capital formation to wealth extraction. That too must change. First, the misleadingly labeled “Regulation Best Interest” has to be changed into an actual fiduciary duty that requires brokers—regardless of title—to put their customers’ best interests first. After all, it’s their customers’ money! Second, shareholders, who are supposed to be owners of the public corporations, must have their proxy access rights restored and they must be able to get unrestricted advice from proxy advisors, independent of biased management influence. Third, the expansion of dark, high risk, investor-unfriendly private markets, at the expense of the public markets, must stop. That means limiting exempt offerings, protecting accredited investors, and ensuring crowdfunding is legitimate. Finally, Gensler must reverse the deregulation that weakened the SEC’s wildly successful whistleblower program.
Second, the unfinished Dodd-Frank agenda includes requiring money market funds to float their net asset value (NAV) and have sufficient capital for times of market stress so that they don’t need trillion dollar bailouts yet again—as happened in 2008 and 2020. The SEC must also enact compensation rules that require corporations to claw back ill-gotten gains from executives and (with other regulators) regulate compensation schemes that incentivize excessive risk taking, which threatens investors, markets, and financial stability. The SEC must finally fix the conflict-ridden issuer-pays model of credit rating agencies, which virtually guarantees that inflated ratings will continue to mislead investors and misallocate capital. Finally, the SEC has to end corporations’ ability to deny injured customers the right to their day in court by forcing them into secret, biased, and unfair arbitration proceedings.
Third, the SEC also faces many issues beyond Dodd-Frank that need Chairman Gensler’s attention. Foremost among them are the currently fragmented and rigged markets. First, the SEC must ensure that the consolidated audit trail (CAT) is completed and implemented, which would finally give the SEC the ability to comprehensively monitor the markets as well as detect, punish, and deter the predators who manipulate them. It also has to address distortive market practices, including “maker-taker” programs and similar inducements that are little more than a legalized bribery system that rips off investors. Thus, the many wealth extraction mechanisms like payment for order flow and generally inaccessible private data feeds, co-location, and other forms of privileged access must be ended. As innovation continues to develop new financial products and delivery mechanisms, including cryptocurrencies and other products, the SEC must ensure that investors and markets are protected.
Although rarely mentioned, the SEC must also dramatically increase the oversight of the industry’s conflicted self-regulatory agencies (SROs) so that they in fact act in the public interest and no longer serve as little more than industry promoters and protectors. The exchanges, FINRA, PCAOB, and MSRB must all be subject to this enhanced oversight.
Fourth, the SEC has to advance the Biden administration priorities, consistent with its independence and mission. That includes ensuring financial market participants are properly regulated as they respond to the COVID crisis and the economic collapse it caused. The climate crisis and investor demands for disclosure of material information related to environmental, social, and governance (ESG) factors, must also be priorities, along with the long overdue response to pervasive racial injustice.
Fifth, the SEC has to respond to regulatory gaps exposed by new developments. For example, the GameStop trading frenzy raised many issues, including protecting retail traders, “best execution” standards, short-seller transparency, oversight of high-frequency trading, and the exploitation via the gamification of trading, as well as capital, liquidity, settlement, and risk management concerns.
Another example is the implosion of the Archegos de facto hedge fund, which cost investors almost $200 billion in market capitalization losses in just eight publicly traded stocks as well as about $10 billion in losses to a handful of global systemically significant banks. That highlighted the need to better regulate securities-based swaps and so-called family offices, including disclosure obligations, and to address leverage and the shadow banking system more broadly. The role of Wall Street’s biggest banks must also be scrutinized because, without them, Archegos could not have happened. Those banks act as prime brokers, market makers, derivatives dealers, securities lenders, and cash and physical market participants. The collision of that interconnected banking and shadow banking system occurs in the capital markets, which lack adequate transparency and SEC regulation. And, that’s not all: there’s also the explosion of SPACs (special purpose acquisition companies) and other vehicles used to access the public markets with greatly reduced investor and market protections and too often present conflicts of interest that demonstrably harm investors.
The SEC has a vital mission, a big agenda, and many pressing challenges, but, as he proved when he was at the CFTC, Chairman Gensler is experienced in moving multiple critical issues through the policymaking process simultaneously. He needs to do the same at the SEC.