Gary Gensler is “taking a wrecking ball to every corner of our current equity market structure in one fell swoop.”

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With these remarks Congresswoman Ann Wagner (R-MO), Chair of the Financial Services Subcommittee on Capital Markets, opened a June 22nd hearing entitled Oversight of the SEC’s Division of Trading and Markets.

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Wagner asserted that the hearing was prompted by Gensler’s rapidfire demolition of current market structure rules. 

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If you come from the “burn the motherfucker down” school of thought, allow us to clarify. Wagner means this in a bad way. In fact, she argues that the SEC’s assault on current market rules comes ”without any definitive explanation or identifying any systemic market problems or failures.” 

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This is a pretty indirect way of saying that Wagner and her allies are hoping to maintain the status quo, one that enriches their biggest donors.

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A quick biography on Ann Wagner—the part that matters anyway. From 2011 to 2022, the Securities & Investment industry was by far the biggest contributor to Ann Wagner’s candidacy—to the tune of more than $1.8 million.

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So now you know who she is.

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Testifying on behalf of the SEC were Trading and Markets Director Haoxiang Zhu and Chief Economist Jessica Wachter. Wagner pointed out that this marked the first time in more than four years that members of the Division had been invited to testify before the committee. She vowed that such hearings would be far more frequent going forward.

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C-SPAN subscribers rejoice. 

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The Fast and the Spurious

At the heart of the hearing is concern that the SEC is simply moving too quickly. Chair Wagner explains that the SEC historically has proposed a single rule at a time, first engaging stakeholders, then painstakingly reviewing comments, then passing a final regulation which can then be subjected to evaluation based on clear and rational metrics.

By contrast, says Wagner, “Just last December, the SEC advanced four proposed rulemakings that will dramatically overhaul our current market structure and how it functions.”

Again, so you don’t get the wrong impression, she thinks this is a bad thing. 

That’s why she proposed a piece of legislation called The SEC Regulatory Accountability Act, which would require the SEC:

“To first implement the Market Data Infrastructure (MDI) Rules adopted in 2020 before finalizing three of the four market structure proposals from December 2022. The bill also mandates the SEC to conduct a study following the implementation of MDI to determine if additional market structure changes are needed.”

And

“To identify and assess the problem addressed by proposed regulations, ensuring the benefits outweigh the costs. It also mandates the periodic review and modification of existing SEC regulations, and requires the SEC to report on the economic impact of major regulation.”

Clearly, the legislation is designed to slow Gensler’s roll. And Wagner isn’t the only one who thinks he’s moving too fast. 

Congressional Speed Humping

Representatives from both sides of the aisle asked pointed questions about whether or not a staggered approach to introducing regulations might be more appropriate, given the scope of the SEC’s ambition.

Rep. David Scott (D-Ga.) asked Zhu if the SEC might consider delaying the other three equity market structure proposals until updated Rule 605 data is available. Rep. Dan Meuser (R-Pa.) suggested a similar approach.

Zhu pointed out that these questions were addressed in comment letters relating to the proposals, and the SEC would be formulating its response as part of the comment review process.

Rep. Bryan Steil (R-Wisc.) asked if Wachter agreed that the Order of Competition Rule conflicts with the Best Execution Rule. She said no. She did not agree.

Steil mansplained that Wachter was mistaken, that these rules are in conflict, and that SEC is guilty of poor transparency. (Steil by the way, is one of just several dozen lawmakers who voted against paid sick leave for retail workers during the pandemic. That has absolutely nothing to do with this, but we thought you should know.)

Responding to Steil, Wachter explained that the “criticisms of these proposals are part of the comment files so we’re going to respond…we are going to read those and evaluate them very very carefully. We’re considering all of these comments and we’re going to do a careful evaluation when we go to adopt the proposals.”

Steil once again decried the Commission’s lack of transparency.

We’ll handle this one…

Dude, respectfully, it’s in the comment letters. 

But it’s cool. It’s obviously not about that.

Hearing You Loud and Clear

If the goal of the hearing was for each subcommittee member to record a usable soundbite expressing a concern which has already been raised during the comment letter period, mission accomplished.

Of course, many lawmakers used a portion of their five minutes to complain that the comment letter periods for the SEC’s proposals were too brief. 

As we mentioned last week, members of WTI submitted more than 5800 comment letters around the new rule proposals. In other words, we found enough time to get our homework done. We handed in the written report. Congress got together for this hearing so they could phone in the oral presentation.

And this is not to undermine the concept of congressional oversight, per se. Nor would we deny that some valid concerns have been raised by members from both sides of the aisle. 

We’ve expressed our own concerns through the comment letter process. We’ve identified ways that the SEC’s proposed rules could be more effective, how they could be grounded in better data, and how they could go even further to protect investors. 

Some of our concerns were even echoed by members of the House Committee…which is to say that there is plenty of merit to hosting a meaningful discussion about this stuff. 

We’re always open to a lively exchange. 

But it stands to reason that we will be in an even better position to have this exchange once the comment review period is complete. Until then, much of what we see in Congress is mere grandstanding.  

So we’re going to table the array of valid concerns raised during the hearing, just as we’ve tabled the concerns cited in our own comment letters, until the SEC does formulate its response. As we’ve said many times, that’s exactly how the process is supposed to play out.

So what about the legislation itself?

Wagner’s Genslerdämmerung

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Last week, the SEC was unstable. This week, the SEC is unaccountable. As per Chair Wagner, the real purpose of the hearing was to advance legislation granting Congress greater control over the SEC. 

This should sound familiar if you tuned in for last week’s discussion on the SEC Stabilization Act, which seeks the total reconfiguration of a Commission characterized as drunk on its own power. As we noted of the legislation last week. It has no chance of passing.

The Stabilization Act is a strategic dart throw–and just one of many. Lobbyists for the finance industry have spread their tentacles far and wide in a quest to strangle regulatory reform. The result is a wave of many minor actions that, together, are meant to constitute a major campaign.

Death to market reform by a thousand paper cuts.

Indeed, Wagner’s Regulatory Accountability Act is, by its explicit design, meant to slow reform to a pace that Congress finds more comfortable. So what would that pace be, exactly?

Well, it’s like this…Gensler is driving the bus from Speed, rigged to blow if it goes below 50 miles per hour.

Members of Congress prefer a light morning jog around the capital in a perfect loop that ends exactly where it began. Then they like to take a long lunch. 

So you can see why they keep ringing the bell, trying to get off the bus.

Where’s the Fire?
On the subject of speed, Zhu pointed out that various features of the market—many driven by advancing technology—have changed rapidly in recent years. Rulemaking has struggled to keep apace. 

The SEC’s newfound quickness is an attempt not just to catch up with market conditions but to enforce rules that in some cases already exist. Best Execution…we’re looking in your direction.

This strategy, opines some lawmakers, is highly inconsistent with the SEC’s previous track record on rulemaking, which, to paraphrase, involves a far slower, more bureaucratically encumbered, and more politically compromised approach.

But do they have a point? Is the SEC simply moving too fast?

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Well, the opinion is not shared by everybody on the subcommittee. Subcommittee Ranking Member Brad Sherman (D-Calif.), while thanking the SEC for its efforts at regulating the crypto market, also argued that the Commission should be going further in its rule proposals. To punctuate the point, Sherman noted that Payment for Order Flow (PFOF) causes investors to lose more than $1.5 billion a year. 

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From that perspective, how much slower should we move? 

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Full Committee Ranking Member Maxine Waters (D-Calif.), in her own opening remarks, argued that her Republican colleagues had essentially produced the legislation currently on the table to help pave the way for Wall Street’s inevitable bevy of lawsuits against the SEC. These lawsuits would only further derail the current pace of reform. 

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But Representative Wagner argues “It is vital the SEC only issues regulations that are absolutely necessary, and to avoid burdening main street investors.”

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“Main Street investors”, by the way, is the condescending way that politicians refer to the enormous and diverse cross-section of American individual investors in America, like we’re all living in Mayfair and cooling pies on the window sill.

So Wagner worries that the new regulations will burden main street investors. 

We have argued that most of these regulations are necessary to create much needed protections for…sigh…main street investors. (That felt dirty. I promise never to use that phrase again).

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The point is, individual investors stand to gain the most from the SEC’s current actions. The sooner we have true best execution, the faster we eliminate payment for order flow, the more inexorably we move toward transparency, the greater the benefit will be to everyday investors.

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The Math of Con

By contrast, certain segments of the securities industry stand to lose the most from the SEC’s market structure reforms. And Wagner wants the math to prove it.

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That accounts for the second part of her proposal. While the first item would slow regulatory reform to a one-at-a-time pace, the second item would require a cost benefit analysis of the additional proposed regulations. 

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Once again, the smell of delay is heavy in the air. Now we’re not saying House Republicans are simply trying to run out the clock on the Biden Administration. We’re also not saying that chocolate is delicious, puppies are adorable, and the Cleveland Browns will never win a Super Bowl. We’re not saying these things, but that doesn’t make them untrue.

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Wagner called on the SEC to determine whether or not the benefits outweigh the costs of the proposed legislation. Rep. Waters countered, calling the cost-benefit analysis a “guise.” 

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She also pointed out that cost benefit analysis is a tool frequently leveraged by opponents of regulations primarily because this strategy is quite effective at quantifying the cost of compliance to industries but far less effective at quantifying the economic benefits of regulation such as stronger investor protections and improved market confidence.

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Translation: 

It’s hard to put a number on what individual investors stand to gain from these protections. It’s much easier to quantify what institutional investors stand to lose—their unfair advantage.

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Or as Representative Waters phrased it during the hearing, “for Wall Street, there’s no benefit that justifies their costs.”

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