Securities and Exchange Commission Chairman Gary Gensler faced a barrage of criticism from members of both parties on the House Financial Services Committee over what some described as the Commission’s “radical agenda” that threatens the integrity of financial markets.
During the nearly five-hour long hearing, Gensler faced numerous questions and pushback on various issues, including whether the Commission has properly conducted economic analysis for its rulemaking activities, such as on its open-end fund liquidity risk management and swing pricing proposal, its actions to require companies to disclose climate risks and its regulatory activity regarding digital assets.
Setting the tone for the hearing, Rep. Patrick McHenry (R-N.C.), who is chairman of the House Financial Services Committee, admonished Gensler, suggesting that he has engaged in a “reckless approach” to rulemaking.
“While the SEC has engaged in a wide-ranging regulatory agenda, you seem to have overlooked the importance of public input—resulting in bipartisan and bicameral concerns,” McHenry said in his opening statement. “Members on both sides of the aisle have raised valid concerns regarding MiFID relief, swing pricing and hard close, as well as your equity market structure overhaul. The SEC has taken no action to address these concerns,” the chairman added.
In fact, prior to the hearing, all Committee Republicans sent a letter to Gensler demanding that the SEC halt the finalization or implementation of interrelated rulemakings until their cumulative impacts are evaluated.
“We are troubled by the Commission’s reluctance to consider stakeholder feedback and its failure to conduct thorough economic analysis. Moreover, we are concerned that the Commission has considered rules related to one another in a siloed fashion and deliberately failed to assess their cumulative impact on investors and the U.S. capital markets,” the Sept. 26 letter to Gensler stated. “As such, the Commission should stop finalizing or implementing any rule until it has comprehensively evaluated the real and cumulative impact of its rulemaking, including the impact on competition.”
Noncommittal on Swing Pricing
Meanwhile, an issue the American Retirement Association has been following closely due to its potential impact on retirement plan participants is whether the SEC plans to withdraw or amend its open-end fund liquidity risk management and swing pricing proposal, after receiving bipartisan requests to do so. Chairman Gensler, however, did not tip his hat either way when asked about it.
As background, the SEC in November 2022 proposed amendments to Rule 22c-1 that would significantly alter the liquidity risk management requirements for open-end funds (i.e., mutual funds and ETFs). Among other things, the proposal would impose a “hard close” on mutual fund orders at 4:00 PM (ET) and would mandate that mutual funds use swing pricing. It also would tighten liquidity requirements on all open-end funds by including a new “bucketing” system.
Rep. Brad Sherman (D-CA) raised the issue during the hearing, noting, among other things, that he believes the swing pricing rule doesn’t achieve its stated purpose, adding that it has been criticized in a letter signed by vast majority of the House Financial Committee Capital Markets Subcommittee members, as well as by the Consumer Federation of America. Further contending that the proposed rule is unfair, such that people who live on the West Coast are at a competitive disadvantage and that the “giant players can participate in CITs rather than mutual funds and get the same benefits and not be subject to this rule,” Sherman asked Gensler whether there’s “any chance you’ll be taking this rule back to the drawing board?”
Gensler was noncommittal, however, saying that the Commission has received a lot of comments on the proposal and that he’s familiar with the letter, but only adding that the SEC would take their comments into consideration. “It's really going at a core feature that when you have a mutual fund, if you redeem in that mutual fund, you should redeem at the right price, so that the remaining shareholders don't get dilution; it works well during normal times; less well in stress times, but we're taking all of these into consideration,” Gensler stated.
“I'll simply point out that for many years, thousands of mutual funds, all competing for capital, could have adopted this rule and not a single one of them thought ‘oh this is what investors want, this is what will seem fair to investors,’” Rep. Sherman said in response.
Several other members raised similar concerns about the swing pricing proposal, including Reps. Young Kim (R-CA) and Steven Horsford (D-NV), contending, among other things, that their constituents would be put at a disadvantage under the proposal.
A replay of the hearing can be viewed here.
