My Advice for the New SEC Chair
With his nomination of Paul Atkins to succeed Gary Gensler as Chair of the U.S. Securities and Exchange Commission, President-elect Trump is signaling his desire to dramatically reshape the agency’s agenda, ending a period of what’s been characterized as overzealous regulatory rulemaking in favor of “common sense regulation.” I’ve written and talked before about excessive rulemaking at the SEC and the danger of unintended consequences, and I hope the incoming chair adopts a more measured approach that allows more time for public debate. My advice is scale back, slow down and don’t try to fix what isn’t broken.
I’d also recommend the incoming chair address two areas in which the agency currently falls short:
Make Crypto Safe
Given the influence big-donor crypto entrepreneurs have with the Trump administration, it’s not surprising the president-elect believes that “digital assets and other innovations are crucial to making America greater than ever before.” But that will entail bringing the wild west of digital assets like digital currencies, stablecoins, decentralized finance platforms and cryptocurrency exchanges under a coherent, multi-regulator public policy framework.
The U.S. Treasury Department estimates that 12% of Americans own crypto assets. But outright criminality, including fraud, theft, market manipulation and scams of all flavors, is rampant in the sector. Criminals stole $14 billion from crypto investors in 2021, and the FBI, Consumer Financial Protection Bureau and Federal Trade Commission received more than 80,000 crypto-asset related complaints or fraud reports in 2021 and the first quarter of 2022. There are few protections available if a digital platform runs into trouble, which happens with alarming frequency.
Unregulated crypto activities are also a growing source of systemic risk to the financial system. Crypto platforms recently grew to over $3 trillion in value, and the number of points at which these platforms intersect with traditional financial institutions have increased.
One of the challenges the new SEC chair will face is that “crypto” refers to a broad range of products falling under the purview of multiple regulators in the U.S. – not only the SEC, but also the Commodity Futures and Exchange Commission and banking regulators. This confusion has created a turf war over what types of products fall under whose jurisdiction, making it difficult for investors to access crypto assets – something that must occur if they are ever to evolve into an asset class whose properties can be quantified for the purposes of including them in portfolios in ways that improve investor outcomes.
It is high time to draw up what outgoing Chair Gensler rightly called a technology-neutral “one rule book” – a market-integrity rule book for crypto assets. A constructive first step toward this is a piece of legislation passed last May with bipartisan support in the U.S. House of Representatives, titled the Financial Innovation and Technology for the 21st Century Act. There’s certainly a lot there for the new SEC chair to build on to help give the public the same protection they get with other securities.
Put a Bell on the CAT
Under the past several chairs, the SEC has mandated the creation of a new centralized database, called the Consolidated Audit Trail (CAT), which requires financial institutions to send electronic feeds of all the information maintained in their records about client accounts and transactions they effect on behalf of investors.
It’s accumulating a staggering 500 billion records per day. No other comparable system or database of this scale and complexity exists anywhere in the world. Developing the CAT will cost over $1 billion (more than 20 times its initial projections!) and operating it will cost roughly $200 million every year (quintuple its original estimate, and nearly 10% of the SEC’s own annual budget).
The noble rationale behind CAT is to enable regulators to use data analytics to better protect participants in the financial markets. But critics of CAT are concerned about threats it poses to privacy and civil liberty – not to mention its potential to expose confidential information to tech-savvy criminals who have repeatedly shown the ability to hack almost any service that hosts sensitive client data.
The most vocal of these critics are the American Securities Association (ASA) and Citadel Securities, who are suing the SEC in federal court over how the costs of CAT are being apportioned:
“This case raises important questions about the validity of a significant order of the U.S. Securities and Exchange Commission (Commission or SEC) that threatens to impose billions of dollars in costs on the financial-services industry (and the investors they represent) to implement a massive, unprecedented government surveillance system that will collect personal information on every American who trades in the U.S. securities markets – all without the approval of, or any funding from, Congress.”
As one of their Day 1 actions, the incoming SEC chair should mothball this example of regulatory overreach gone awry.
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