In a rush to protect retail investors, new Securities and Exchange Commission Chair Gary Gensler is promoting ill-considered policies that will undermine everyday investors. That means business as usual at the SEC, continuing a pattern of failing to trust retail investors while favoring established players.
Whether it’s app-based trading, cryptocurrencies, or reckless tweets, politicians have fretted this year about tech-savvy predators conning retail investors, and now Gensler is charging in. During recent congressional testimony and other public appearances, Mr. Gensler claimed that legal gaps threaten investors. Thus the Commission must “freshen up” rules, promote an “active policy agenda,” and urge new congressional action.
That doesn’t bode well.
Mr. Gensler’s protective instincts continue a pattern of mistrust of technology and outsiders that harms those the Commission is most keen to protect. For example, retail investors are essentially excluded from the private markets leaving only accredited investors the Commission believes can “fend for themselves” without mandated and costly disclosures. This market aggregates around $1.5 trillion per year; all the risk and rewards go to the already well-off. It’s why one wealthy investor’s $300,000” Coinbase investment morphs into $680 million, while “protected” investors scrounge for public-market scraps.
But in fact, when given the opportunity retail investors have traversed the private markets just fine. Congress passed the JOBS Act of 2012 to open the private-market door slightly to retail investors, mainly through Title III (internet-based equity crowdfunding). Due in part to COVID online crowd-based capital raising has exploded recently both in investors and investment, without any incidents of fraud.
Equity crowdfunding’s success came despite strong Commission opposition. Commissioners then were convinced fraudsters would con everyday Americans and the Commission would get the blame.
Commissioner Luis Aguilar stated, “I cannot sit idly by when I see potential legislation that could harm investors. This bill seems to impose tremendous costs and potential harm on investors with little to no corresponding benefit.” Then-Chair Mary Schapiro joined, attacking the crowdfunding provision as enabling “fraudulent schemes designed as investment opportunities.” The bill’s sponsor Rep. Patrick McHenry (R-NC) later described Ms. Schapiro’s actions as “being sideswiped by a regulatory body at the eleventh hour.”
In fact, the Commission has never welcomed innovation. Instead, it has been overly fixated on protecting investors via a costly public-market disclosure regime. Large companies excel at navigating compliance that leaves investors with more information but less choice. It also breeds familiarity between regulators and businesses that distort priorities. In fact, massive frauds have occurred under the Commission’s nose while it racked ever higher but meaningless enforcement “wins.” The list of boondoggles it missed despite red flags and whistleblowers could be a corporate Hall of Shame, including Enron, Lehman Brothers, and Bernie Madoff.
As Gensler’s fellow Commissioner Hester Peirce has stated,“Entrepreneurship and innovation do not have the happiest of relationships with regulation. Regulators get used to dealing with the existing players in an industry, and those players tend to have teams of people dedicated to dealing with regulators.
The huge new opportunities for innovation and wealth creation include app-based trading and cryptocurrency. Regarding crypto, Commission chair Jay Clayton appeared habitually perplexed, fumbling to appoint a crypto ‘czar’ and seemingly most concerned to avoid leadership on this dynamic issue.
Yet the Commission under Mr. Gensler seems poised to take an even more restrictive approach than his predecessor. In a recent interview, Gensler refused to rule out banning so-called ‘payment for order flow.’ This mechanism allows apps to offer commission-free trading. Of course, this trading isn’t costless, tradeoffs lurk as with “free” Facebook accounts. But instead of letting users decide, Gensler opined, “transparency may not be enough.”
The news is even worse for crypto. Gensler also advocates for a new federal regime to oversee crypto exchanges and a new wave of crypto prosecutions. This is disappointing, because he has substantial crypto competence, having taught a course on ‘Blockchain and Money’ at MIT. But it does align with the federal government’s wide-ranging assault on crypto, from the Federal Reserve stating a Central Bank Digital Currency is a ‘very high priority,’ to Senator Sherrod Brown (D-OH) seeking toregulate away private currencies, to onerous digital-wallet rules, to the IRSwar on gains. For years, the Commission has repeatedly blocked Bitcoin exchange-traded products.
Mr. Gensler’s would-be “reforms” will lead to costs borne most by everyday Americans. Gensler, whose net worth exceeds $100 million,won’t be affected. But he will undermine others seeking financial success through America’s still-dynamic entrepreneurial spirit. This stratifies wealth in our society while effectively discouraging innovation.
What Mr. Gensler should do is re-focus the Commission on prosecuting wrongdoers within its midst and spare innovators his regulatory weapons. The Commission should punish fraud, but it must abstain from protecting people from technologies they embrace and risks they willingly take as with app-based trading and crypto investing.
