This article originally appeared in InvestmentNews by Mark Schoeff, Jr.
Investor advocates and other experts expect Gary Gensler to strengthen the broker investment advice standard his predecessor put in place rather than redo it when he takes over the Securities and Exchange Commission.
President-elect Joe Biden said on Monday he will nominate Gensler to be the next SEC chairman. If he’s confirmed by the Senate, Gensler will give the five-person panel a 3-2 Democratic majority.
A former chairman of the Commodities Futures Trading Commission, former Treasury Department official and former Goldman Sachs executive, Gensler has developed a reputation as a tough regulator who also was successful on Wall Street.
“We couldn’t have asked for a better selection,” said Barbara Roper, director of investor protection at the Consumer Federation of America. “He brings the insider’s level of expertise about the market combined with an unwavering commitment to investor protection.”
Roper and other investor advocates criticized Regulation Best Interest, the broker advice standard that went into force last June, for being too weak to curb broker conflicts. It was the signature rulemaking of former SEC Chairman Jay Clayton, who said it is significantly stronger than the previous broker suitability standard.
Gensler likely will amend Reg BI rather than end it and start over, Roper said. Torching Reg BI would ignite a battle with the financial industry, which mostly supported the measure.
It can be strengthened while avoiding such fireworks, Roper said. For instance, the SEC could adopt a principles-based definition of “best interest’ and strengthen conflict-mitigation requirements. “Gary’s pragmatic,” Roper said. “There’s a lot you can accomplish within the framework of Reg BI to make it live up to its ‘best interest’ label.”
Knut Rostad, president of the Institute for the Fiduciary Standard, also expects Gensler to bolster Reg BI without killing it. “His changes to Reg BI will make it a reality-based rule rather than a myth-base rule,” Rostad said.
Gensler will pursue aggressive enforcement of Reg BI rather than waste political capital scrapping it, said James Lundy, a partner at Faegre Drinker Biddle & Reath. “It makes more sense to utilize resources to enforce Reg BI as opposed to utilizing resources to overturn Reg BI,” said Lundy, a former SEC senior trial counsel in enforcement.
The Financial Services Institute, a proponent of Reg BI, also wants to see it remain in place.
“The SEC has achieved significant accomplishments in recent years, particularly with Reg BI, which enhances investor protection while preserving investors’ access to their choice of financial products, advice and services,” FSI chief executive Dale Brown said in a statement. “We are committed to working with all commissioners, including Gary Gensler if he is confirmed by the Senate, to build upon its achievements and ensure rulemaking that is effective and workable for all stakeholders.”
Although Gensler has gone through the revolving door from Wall Street leader to a Washington regulator, he maintains the confidence of investor advocates through his work to reform swaps markets following the financial crisis while at the CFTC from 2009 to 2014, and his work as chairman of the Maryland Financial Consumer Protection Commission.
“Gary Gensler worked in the jungle of Goldman and applied what he learned at the CFTC,” Rostad said. “He is going to be able to get regulations through that are going to address the real issues regarding the markets because he has been there and can speak to the industry from his experience in the way other SEC chairs have not been able to do. He’s not there to punch a ticket on his resume. That means independence, and that is huge.”
When Gensler went to the CFTC, Wall Street may have anticipated a friend in a high place. But he quickly changed that perception, said Ashley Ebersole, a partner at Bryan Cave Leighton Paisner.
“He was not afraid to go after large financial entities, such as banks and investment banks, and punish wrong-doing there,” said Ebersole, a former senior SEC enforcement counsel.
Gensler is likely to bring that attitude to the SEC along with a focus on consumer protection that comes from his experience as head of the Maryland commission.
“In the Maryland position, he focused on increasing consumer protections, including standards of conduct and care for regulated entities,” Ebersole said. “So you’d expect the SEC to continue its laser focus on consumer protection, including through an aggressive enforcement posture.”
Like other Democratic SEC chairmen, Gensler will emphasize enforcement, Lundy said. “We’ll see an aggressive enforcement climate.”
