Senate Banking Committee Nomination Hearing for SEC and CFPB
Senate Banking Committee
Hearing to Consider the Nominations of Gary Gensler and Rohit Chopra
Tuesday, March 2, 2021
Chairman Sherrod Brown (D-Ohio)
In his opening statement, Brown said both Chopra and Gensler will fight for the workers, families, communities, and small businesses that have been left out, noting that wages are not keeping up with the cost of living. He discussed the racial wealth gap, particularly the widest racial home ownership gap in fifty years. Brown said the stock market is detached from reality, noting that stock prices have increased during the pandemic and corporations paid dividends to shareholders while rolling back hazard pay for workers and laying people off. Brown commended Gensler’s charge against big banks and their manipulated interest rates in 2012. Brown argued that Gensler will bring the focus back to the people who make the country work, including by updating outdated climate risk disclosure requirements, punishing misconduct, enforcing the protections on the books, and working with other agencies to confront problems before they become emergencies. Brown concluded that both nominees will stand up for all workers and their families and will help chart the course out of the pandemic.
Ranking Member Pat Toomey (R-Pa.)
In his opening statement, Toomey said the economy is now in recovery mode but any number of actions the federal government could take would stifle the ongoing recovery. He argued that if the Securities and Exchange Commission (SEC) and Consumer Financial Protection Bureau (CFPB) impose burdensome and restrictive regulations, it could limit consumers access to credit, hamper job growth by limiting access to capital markets, and restrict the ability of publicly traded companies to act in the best interest of their shareholders, all of which, Toomey said, would impede economic growth. Toomey noted his concerns about Chopra, including Chopra’s aggressive anti-business stance, hostile relationships with lenders, and Chopra’s favoring of unaccountable regulators with vast powers. Toomey then commended Gensler’s knowledge about securities markets. He stated that the SEC has a history of bipartisanship but raised concerns that Gensler will use securities laws to advance a liberal, social, and cultural agenda on issues like climate change and racial inequality. Toomey argued that securities laws are not the appropriate vehicle to change such policies. Toomey, noting Gensler’s history of pushing legal boundaries at the Commodity Futures Trading Commission (CFTC), questioned whether Gensler would also push the legal boundaries of the SEC’s authorities in order to advance a liberal social agenda.
The Honorable Gary Gensler to Chair the Securities and Exchange Commission
In his testimony, Gensler said he has spent his entire professional career in and around the financial markets, working in the private sector, in state and federal government, and in academia. He said that when the SEC does its job and when there are clear rules and someone to enforce them, the economy grows and the nation prospers. He said he will work with the SEC Commissioners, staff, and Congress to ensure the American markets remain the world’s best. He argued he will do so by strengthening transparency and accountability in markets; promoting efficiency and competition; making sure companies, both incumbents and start-ups, can raise needed capital to innovate, expand, and contribute to economic growth; and ensuring the markets serve the needs of working families. He argued that markets and technology are always changing and therefore the rules must change along with them. Gensler concluded by saying that financial technology can be a “powerful force for good,” but only if we continue to harness the core values of the SEC to serve investors, issuers, and the broader public.
The Honorable Rohit Chopra to be Director, Bureau of Consumer Financial Protection
In his testimony, Chopra said that, due to the pandemic and financial crisis, experts expect distress across a number of consumer credit markets, including an avalanche of loan defaults and auto repossessions. He said due to the economic devastation, millions of people face the prospect of losing their home, with communities of color particularly at risk. Chopra argued the United States faces an important test to ensure that the troubles in the housing and mortgage markets do not sabotage the recovery of local communities. Particularly in the mortgage community, Chopra said that fair and effective oversight can promote a resilient and competitive financial sector and address systemic inequalities faced by communities of color. He said that Congress empowered the CFPB to carefully monitor markets to spot risks, ensure compliance with existing laws, educate consumers, and promote competition, all of which, Chopra said, help protect Americans from fraud and unlawful conduct and help ensure that businesses that follow the law, regardless of their size, can continue. Chopra concluded by pledging to be a partner to all to tackle the pressing problems that families face in their financial lives.
Question & Answer
Sens. Richard Shelby (R-Ala.), Chris Van Hollen (D-Md.), Bob Menendez (D-N.J.) and Toomey asked about disclosure requirements relating to political campaign spending and what amount of money counts as significant to make public for investors. Gensler said he is grounded in economic analysis and the materiality standard as the courts and law have defined it. He said disclosures are critical to investors and promoting capital formation. He said often a small piece of information can be argued as not material, but that as times evolve, the investor community gets to decide what they consider today to be material and significant.
Sens. Elizabeth Warren (D-Mass.) and Cynthia Lummis (R-Wy.) asked about disclosures around climate related risks. Warren said the SEC is not requiring companies to make full public disclosures about climate related risks and asked why companies should be able to hide climate risks from investors. Gensler said companies should not be able to hide climate risks. Lummis argued that state revenues around the energy industry are declining dramatically and questioned the impacts of making it more difficult for energy companies to raise capital. Gensler said the disclosure regimes on climate risk can be pro-issuer, pro-corporation, and pro-investor.
Market Structure and Volatility
Sens. Mark Warner (D-Va.), Jack Reed (D-R.I.), Toomey and Brown asked Gensler about his top priorities for addressing market structure in light of the recent volatile trading issues and potential “gamification.” Warner asked for a review of market structure, citing conflicting arguments between firms over broker payment fees, low price commissions, and liquidity. Reed asked for more scrutiny and evaluations on payment for order flow (PFOF). Toomey asked for a full evaluation of proposals in his letter to the SEC and to focus especially on shortening the settlement cycle from T+2. Gensler said he looks forward to a review on each of these market structure issues. He said he wants to promote efficient, fair, and orderly markets. He said the SEC needs to ensure customers get best execution with PFOF, protect them against apps and gamification that incentivize more trading, and figure out how to promote competition in markets when a few firms come to dominate those markets. Gensler said he is not in favor of a handful of financial firms buying most of the retail flow in America as it can negatively impact prices and best execution for the consumer. Gensler also expressed support for shortening the settlement cycle for equities.
Sen. Jon Ossoff (D-Ga.) said investment banks are too heavily subsidized and remain dominant not because of their capital allocation or risk management, but because they receive government bailouts. He said this is worth regulatory capture for the CFPB and asked how ordinary people can get access to emergency financial support as easily as large banks do. Chopra said the idea of being “too big to fail” is a problem that Congress needs to address and he supports modernizing our payment system and real time settlement to get equal access to everyone.
Sen. Catherine Cortez Masto (D-Nev.) expressed her concern with investors potentially getting in over their heads using no-fee online trading platforms. She asked what steps the SEC will take to protect less risk-knowledgeable investors who want to be involved in the stock market. Gensler said he will work to protect investors as it is a key mandate of the SEC and the core of their mission. He said while technology has provided greater access to retail investors, we need to study what “gamification” means for our marketplace.
Sen. Steve Daines (R-Mont.) asked how the SEC Enforcement Division decides to engage in action and determines if guidance or rulemaking is more appropriate. Subjects he flagged as needing enforcement action included theft from senior citizens and Ponzi schemes. Gensler said his philosophy is that enforcement follows the facts and law to stamp out fraud and manipulation in the markets. He said rulemaking is different than enforcement but supports action in the areas Daines flagged.
Van Hollen mentioned his plans to reintroduce legislation on SEC “good housekeeping principles” that include bills on 10(b)5 plans and the 8-K trading gap. He said this will provide investors with more confidence and asked for Gensler’s commitment to provide technical assistance in passing these bills, to which Gensler said yes.
Sen. Thom Tillis (R-N.C.) asked if Gensler supports activity-based approach changes to Financial Stability Oversight Counsel (FSOC) designations. Gensler said he supports Treasury Secretary Yellen’s stance on these reforms.
Financial Transaction Tax (FTT)
Tillis asked about the impact of implementing an FTT. Gensler said it is not something he has studied closely but noted that the U.S. has a modest transaction fee to support the agency of the SEC and with that modest level, it has survived, and we have the deepest most liquid markets. He said he will have a dialogue and review the proposals that Tillis mentioned.
Digital Assets / Tech Reg
In response to a question from Brown, Chopra said the biggest risk people face regarding their finances involves how big technology companies are entering financial services and the risk it poses for privacy and data security.
Sens. Mike Rounds (R-S.D.), Bill Hagerty (R-Tenn.) and Lummis asked how we can create better regulatory environments for innovators and what the SEC’s approach is to digital assets and cryptocurrencies. Lummis asked specifically for more legal clarity for innovators and the blockchain industry, asking how we can ensure consumer protection for digital assets while not hampering innovators. Gensler said the technology markets are constantly evolving and we must continue to provide guidance and clarity. He said one area of consumer protection is based around the custody of their funds and ensuring that it works. He said investor protection on exchanges that trade these currencies is important to make sure the markets are free from fraud or manipulation. Speaking on the importance of blockchain technology in general, Gensler said it has been a catalyst for change, forcing central banks around the world to provide more inclusive payment structures and systems that operate 24/7.
Tillis brought up the lack of electronic delivery and asked Gensler to make digital delivery alternatives a priority. Gensler said he has worked on e-delivery and e-signature efforts in former administrations and plans to continue these efforts.
Brown, Menendez, Cortez Masto and Toomey asked about diversity requirements in corporations as a result of the NASDAQ proposal to require company boards to reach a diversity quota relating to race and gender. In response to Brown, both nominees said they will commit to hiring diverse candidates throughout their agencies. Menendez and Cortez Masto both argued that corporate America has a diversity problem, and the NASDAQ proposal would not act as a checkbox but rather cause a much-needed cultural shift. Both Gensler and Chopra expressed their belief that diversity on boards and in senior leadership promotes better decision making and performance and would be a positive benefit to companies. Menendez asked if investors should be informed about corporate policies surrounding diversity, to which Gensler said he will aim to require information that investors want to see in these areas.
Toomey expressed concern that an SEC board diversity rule would not ensure best interest for the company and consumers. Toomey said boards should be filled by the most qualified leaders without needing to meet diversity quotas.
Daines asked if Gensler is concerned about the lack of competition in the market and conflicts of interest relating to the proxy advisor duopoly. Gensler said he supports good competition to bring about transparency and wants to address any conflicts of interest between firms. Daines asked if the SEC has a responsibility to ensure the proxy advisor systems function accurately. Gensler said it is within the SEC’s authority to see if there are remaining items that need to be addressed. Gensler noted the importance of proxy advisors in providing efficiency for pension funds and that they have played a necessary role during proxy season.
Sen. Tim Scott (R-S.C.) asked Gensler if he supports open competition among nationally recognized statistical rating organizations (NRSROs) for protecting investors and promoting vibrant capital markets, saying more competition is in the best interest of the consumer. Gensler said competition is important in the credit rating space and broader capital markets, adding that he wants to promote competition in the credit rating space.
Sens. Jon Tester (D-Mont.) and Brown asked Chopra what role the CFPB can play in preventing another foreclosure crisis, and what his priorities are for affordable housing generally and as it relates to people of color. Chopra said it is critical for the CFPB to be ready for potential future problems like widespread forbearance and foreclosures by monitoring markets and enforcing homeowner protections. Tester asked what is most important when addressing the Qualified Mortgage rules to ensure people have the ability to own their homes. Chopra said he has a completely open mind about this, that the CFPB is not here to dictate housing finance policy but more to balance consumer protections.
Cortez Masto asked about restitution and discouraging bad actors, saying she was concerned by CFPB’s enforcement actions failing to provide restitution for people who dealt with unfair and abusive practices. Chopra said when victims of fraud and misconduct are not made whole, it hurts both the consumer but also every other business that is trying to follow the law. He said he will push for restitution to remain a critical part of the CFPB’s work.
Rounds raised his concerns with the broad range of fines the CFPB has, arguing there are many places, as identified by GAO, for funds to be improved, particularly the Civil Penalty fund. Chopra said he agrees the funds should not be used to subsidize unrelated operations. He said it is primarily for victim relief and will not be used for anything other than its statutory purpose.
Sen. Raphael Warnock (D-Ga.) asked Chopra about his experience enforcing and expanding consumer protections, especially for military families. Chopra said the CFPB will continue to work with the Justice Department and other regulators to crack down in this area, especially as they anticipate risks in the mortgage market.
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