Financial Institutions Law Alert

Biden’s pick for head of the SEC and the future of Reg BI

In December 2020, Maxine Waters, Chair of the House Committee on Financial Services, wrote a letter to then President-Elect Joe Biden laying out her long wish-list on how he should reign in Wall Street after four years under an absentee landlord administration. One of her requests that got much attention in the industry was her demand that the new administration repeal the controversial and beleaguered Reg BI. Waters and her fellow progressives saw it as a regulation designed by and for the industry's benefit by SEC Chairman Jay Clayton.

In reality, no one really saw Jay Clayton as a champion of the little guy, even when he tried to convince everyone that Reg BI signaled the dawn of renewed Wall Street regulation. Clayton was a corporate lawyer who came to the SEC from Sullivan & Cromwell after a career representing big banks and other large corporations. His assurances that Reg BI "… will significantly benefit Main Street investors" was little comfort to progressives who believed he was more friend than foe to the industry.

December 2020 seems like a lifetime ago. As the Biden administration now begins to shape its regulatory agenda, Clayton and his portrayal of Reg BI have faded into history.

Biden’s pick of the former chairman of the U.S. Commodity Futures Trading Commission (CFTC), Gary Gensler, to head the SEC, is ample evidence that he is serious about keeping Wall Street in line. Gensler is a respected and well-known regulator. He spent five years as the head of the CFTC from 2009 through 2014. Any practitioner who has ever represented a client before the Commission knows it is not light work.

Gensler’s tenure began with the incoming Obama administration in 2009. He was immediately faced with changing the Commission's reputation of regulating small firms in the obscure world of commodities trading. His work making the agency a relevant player in rebuilding Wall Street regulation after the credit crisis of 2008 probably saved it from being folded into the SEC as many had called for at the time.

Big wins in the LIBOR manipulation cases and working with the SEC investigating 2010’s Flash Crash contributed to Gensler’s reputation as a hard-nosed regulator with no patience for institutions or industry practices that threatened the average investor.

Indeed, in his prepared remarks at his confirmation hearing, he specifically told members of the Senate Banking Committee that the SEC, under his leadership, will make sure that US markets “…serve the needs of working families.” Gensler began his remarks intoning his humble beginnings: "I'm a product of a working family. Neither of my parents went to college. But my father was able to take his mustering-out pay from World War II and start a small business that would eventually send my four siblings and me to college. That is the kind of economic opportunity that should be available to each and every American, no matter who they are. I believe our markets are essential to providing that opportunity."

There was nothing quaint and humble about Genlser’s career. He holds an undergraduate degree and MBA from Wharton. He began his career at Goldman Sachs, where he served 18 years.

Gensler began his regulatory career working for Robert Rubin, who had been appointed US Treasury secretary by President Bill Clinton. He then became an under-secretary to Mr. Rubin’s successor, Larry Summers. Gensler was also a senior advisor to U.S. Senator Paul Sarbanes in writing the Sarbanes-Oxley Act of 2002.

Since leaving the CFTC in 2014, Gensler has been at MIT, studying and teaching blockchain and cryptocurrency. The recent news cycle makes it abundantly clear that his academic pursuits were right on target for the newest challenges that technology has thrown at Wall Street.

Members of the Senate Banking Committee certainly focused on the issues of the day while questioning Gensler at his recent confirmation hearing. Still, none of them touched his view of Reg BI or the Fiduciary Standard. It is clear that even with a Democratic majority in the House and Senate, Waters and other Democratic leaders in both houses have all but abandoned their calls for a broad fiduciary standard that died with the Obama-era DOL law.

An experienced regulator like Gensler knows that gutting Reg BI instead of aggressively enforcing it would be a waste of time. Rebuilding from the ground-up in this perennially polarizing political climate is a guaranteed recipe for failure. Gensler is smart enough to know that picking a fight with the industry that roundly supported Reg BI is no way to start a productive working relationship.

Gensler has a strong foundation to build on. Reg BI requires that firms: act in the best interests of their clients, disclose conflicts of interest, identify and eliminate those conflicts or, at best, mitigate them and build the policies and procedures necessary to affect these rules.

First and foremost, Gensler and the SEC must address the rule's most significant shortcoming: it fails to define in its most basic form what "best interest" really means. That ambiguity was no accident. Leaving judges, arbitrators, and regulators to decide what the rule meant was an effective way to avoid consistent, meaningful enforcement. Defining the standard must be the first way to stiffen Reg BI’s spine.

At its heart, Reg BI seeks to mitigate the seemingly inherent conflicts of interest between investment banks and their clients. Those conflicts need to be clearly defined. Firms and the public would benefit from a more focused conflict standard and clear and concise mitigation requirements.

The industry should welcome these changes and be part of the conversation on how to implement them. A vague set of standards serves to protect very few and is subject to inconsistent enforcement.

Gensler’s next step should demand the industry’s prompt attention: the expected increase of exams and enforcement once the rule goes through its overhaul. The industry wasted nothing in the last few years creating training, policies, and procedures. The enforcement of these internal policies is the industry’s best defense against a renewed focus of SEC under its new leader.

In terms of Reg BI, the SEC is already on the move. The most recent SEC Division of Exams “Exams Principals and Priorities” letter, published in the first week of March, highlights its review of 13,000 form CRS submissions in 2020 and the steps it intends to take to strengthen firms’ compliance with the rule.

Gensler has a lot on his plate, and Reg BI is only one of many SEC priorities, but the opportunity to put some teeth into the rule and back it up with renewed focus and exams is well within reach. The industry is well-advised to be ready for those challenges.

While Maxine Waters did not get the fiduciary standard she hoped for from Joe Biden, she did get a motivated, experienced regulator who will do everything he can to level the playing field between Main Street and Wall Street.

The analysis contained herein does not constitute legal advice and is for informational purposes only. Any opinions or statements by the author are his own and do not necessarily reflect the views of Bressler, Amery & Ross.

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