SEC Chair Gensler Foreshadows an Iron-Fisted Approach to Investor Protection at FINRA Annual Conference

The 1,700 market participants who heard new U.S. Securities and Exchange Commission (SEC) Chair Gary Gensler’s remarks at the remote annual meeting of the Financial Industry Regulatory Authority (FINRA) on May 20, 2021, came away with a clear vision for the regulators’ top priority this year.

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Gensler pledged the SEC will move to aggressively protect retail investors at a time of unprecedented growth among such rapidly evolving issues as cryptocurrencies, a once-in-a-generation number of traditional initial public offerings (IPOs), and an exponential increase in the number of special purpose acquisition companies (SPACs) in the last five years.

“Every day, I am animated by working families and what the SEC means to them,” Gensler said. “I’m also thinking every day about the SEC’s three-part mission to protect investors, facilitate capital formation, and what links the two: fair, orderly, and efficient markets.

“We need rules of the road and a cop on the beat to protect everyday investors and achieve our three-part mission. Enforcement is about following the facts and the law, wherever they may lead, on behalf of investors and working families. We need to do whatever we can to ensure that bad actors aren’t playing with working families’ savings and that the rules are enforced aggressively and consistently. That means holding individuals and companies accountable, without fear or favor.”

 

A Request for More Cops on the Beat

A week after his remarks at the FINRA Conference, Gensler asked Congress for an unspecified increase in funding to help his agency oversee a watershed period of growth in the nearly $100 trillion capital markets. In prepared remarks to a House Appropriations subcommittee, Gensler said the SEC’s overall headcount has dropped 4% in four years and the SEC’s enforcement staff has decreased by 6% over the same period.

The SEC’s staff has shrunk as our capital markets have grown, but the SEC has not grown to meet the needs of the 2020s,” Gensler said in prepared remarks to a House Appropriations subcommittee.

Gensler said that even as SPACs, cryptos, IPOs and other financial instruments have expanded, his agency’s headcount has dropped some 4% in four years. While the SEC’s staffing has dwindled, 700 SPACs have filed for IPOs so far this year, with some 300 completed to date, compared to the 13 completed SPAC IPOs in the entire 2016 calendar year.

Gensler told Congress the crypto market has grown to $1.6 trillion from just $9 billion five years ago. He also said “at the current rate, I expect there will be more traditional IPOs than there were during the dot-com peak of 2000.

“The scope, scale, and complexity of our capital markets have continued to grow, (but the SEC) is working with fewer staff than five years ago,” Gensler told Congress. “As more Americans are accessing the capital markets, we need to be sure that the commission has the resources to protect them.”

 

Timely Takeaways for Advisers

Given time to reflect on Gensler’s remarks, the following thoughts should be top-of-mind for advisors in the months to come:

  • Gensler cautioned advisers that they need to strive to follow the spirit of the law, not just whether something is technically crossing a line.
  • Under Gensler, the SEC believes that individual accountability is essential to enforcement, including individual bars and other relief.
  • As technology continues to evolve, the SEC and FINRA will continue to pursue regulatory enforcement for wrongdoing involving cryptocurrencies, cyber security, and fintech.
  • The SEC will bring cases across a wide spectrum of enforcement, whether deceptive conduct by private funds, insider trading, market manipulation, failures to act in retail customers’ best interests, and best execution.
  • In fact, advisers should expect the SEC to intensify its efforts to assess compliance with Regulation Best Interest with a focus on a firm’s policies and procedures and their effectiveness.
  • Firms should be prepared to tell examiners how they make the recommendations they do and why.
  • Firms should review their policies and procedures to see they adequately address SEC hot buttons in terms of disclosure on climate change, human capital, product costs, and adviser compensation.

It would come as no surprise to see a larger, more aggressive SEC under Gensler in the months to come, with increasingly stringent enforcement actions. The specialists at Core Compliance can help your firm meet the challenge by reviewing the information in these bullet points, and much, much more. Contact us today at (619) 278-0020 or visit us online at corecls.com to schedule a consultation.