Watch out for Wall Street: SEC Gensler carries a big stick
The last time Gary Gensler ran a US financial regulator, he was tasked with cleaning up the mess left by the 2008 crash. The new chairman of the US Securities and Exchange Commission now faces a rather different task. : control volatile and sparkling markets which can hide all kinds of bad behavior.
Frenzied negotiation and negotiation, cheap financing, and hybrid labor have created a perfect storm of opportunity for scammers. The pressure is on Gensler and his Police Chief Alex Oh to squeeze and deflate bubbles before they burst.
They are taking over an SEC that is struggling with working from home and overwhelmed with new filings for initial public offerings and special acquisition companies known as Spacs. He’s also been criticized by critics who say former President Jay Clayton’s focus on Main Street investors has left Wall Street dangerously free. The total of law enforcement cases fell to its lowest level in six years in fiscal 2020, although the SEC collected a record $ 4.7 billion in claims.
At worst, we could see a repeat of 2001, when the dotcom bust exposed monstrous accounting and Wall Street scandals that undermined public confidence. Then SEC chairman Harvey Pitt, a financial industry lawyer, was slow to respond to public anger, which ultimately cost him the job.
Gensler, who started his career at Goldman Sachs, is unlikely to make the same mistake. While chairman of the smaller Commodity Futures Trading Commission, he was regularly described as “aggressive” and “hated” as he pushed through post-crisis rules and forced big banks to cough up billions. to rig the exchange rates and the bank financing Libor rate.
“Gary got the job for a number of reasons, undoubtedly one being to lead a rigorous and effective enforcement program. Considering my time spent working for him, I think he will do just that, ”says David Meister, former CFTC enforcement director.
Choosing Oh reinforces the feeling that Gensler will be playing hardball. As a securities fraud attorney, she had an uncompromising approach to settlement negotiations. “It’s not a crowd with a sense of humor and they are going to be very aggressive,” said a defense attorney. “They are looking for problems rather than having them land on their doorstep.”
Yet it is essential that their pugnacity is channeled in the right direction. If the SEC oversteps, it could end up with legal losses that would restrict its powers. Look at the Federal Trade Commission: Last week the Supreme Court unanimously reduced its ability to seek cash compensation companies.
So what are they going to do first? After Gensler was selected, but before its confirmation, the SEC took three notable steps: It released staff send subpoenas without having to seek authorization from the five-member committee; sent Wall Street companies a broad request for information on Spacs; and set up a working group to identify companies that mislead investors about their environmental, social and governance impact.
Looser assignment rules are typically used by SEC presidents (mostly Democrats) to embolden staff and signal that the agency is on the prowl. On Spacs, they will look for undisclosed conflicts of interest between banks, private equity firms and celebrities who market these blank check vehicles. They will also run a microscope on promises made by Spacs when they later merge with private companies.
If the SEC finds signs that banks and sponsors were using financial projections they didn’t believe or failed to verify, it could lead to cases like those which saw Wall Street banks paying billions for. misleading investors about dotcom IPOs. Finding ESG violations could be difficult, as there are no specific disclosure rules. When New York State officials filed a climate complaint against ExxonMobil in 2019, they badly lost.
However, don’t expect the SEC to stop there. The frenzy around GameStop and other meme stocks has raised concerns that trading apps like Robinhood are mistreating small clients. A new rule requiring brokers to act in the best interests of clients must be applied. And the collapse of Archegos, which cost the big banks more than $ 10 billion, underscores the need to break through the secrecy around family offices and the derivatives they use.
These problems can lead to stricter regulations. But developing a measured response takes time. High-profile and expensive enforcement cases are a faster way to change behavior. Look for Gensler to make the most of this.
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