Chairman, SEC
SEC Chair Gary Gensler Talks New Hedge Fund Rules, Crypto | Bloomberg Talks
The SEC voted on new requirements for hedge funds and brokerages that SEC chair Gary Gensler says will help lower risk throughout the financial system. He spoke about the new rules, crypto regulation and more with Bloomberg's Kailey Leinz.
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About Gary Gensler
Gary Gensler, former chair of the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), has been active in media appearances discussing securities regulation, prediction markets, and artificial intelligence. Regarding the SpaceX IPO, Gensler said the offering represents a shift in corporate governance, noting that insiders will not have a traditional lock-up period and that shareholders cannot sue the company but must go to arbitration. He stated that these risks "have to be understood by shareholders." On the topic of quarterly earnings reports, Gensler opposed a proposal to move to semi-annual reporting, calling it "a solution in search of a problem" and arguing that transparency is important for capital markets. Gensler has been a vocal critic of expanding the CFTC's authority over prediction markets and sports betting. He argued that Congress did not intend for the CFTC to become a national regulator of sports betting when it passed the Dodd-Frank Act, and said states should regulate such activities. He also warned about the risks of AI, stating that "we will have a financial stability event" if banks and trading shops rely on the same AI models, and that threat actors will use AI to probe for vulnerabilities. Regarding insider trading in prediction markets, Gensler said Congress should prohibit government officials and their families from trading on these platforms, calling it "too hard to police this and to enforce it rigorously."
Transcript (22 segments)
✨ AI-enhanced transcript with speaker attribution
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Narrator0:00
The SEC voted on a new mandate for hedge funds that SEC Chair Gary Gensler says will help lower risk throughout the financial system. He spoke to Bloomberg's Kayleigh Lines about the new rule and more, just moments after the vote.
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Kayleigh Lines0:14
Does this new rule go far enough to address those concerns, or should the SEC do more to address that?
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Gary Gensler0:23
Well, what we did today is one part of a set of reforms that we're looking at, but an important part of it because it has to do with lowering risk in the system in the US Treasury markets. And to your question, there is a lot of borrowing leverage in the Treasury markets. Bringing things into central clearing can address that in a number of ways. One is the clearing itself does something called multi-party netting, which lowers a lot of risk in the system. But secondly, clearing houses collect more, they collect collateral against transactions. And right now, a lot of the markets is operating and is not collecting collateral or margin.
K
Kayleigh Lines1:12
So like the ICBC hack we saw just recently, which was disruptive to the Treasury markets in some ways, would what just passed today help avoid that in the future? Is it a step toward avoiding that, or do you still see situations like that could arise?
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Gary Gensler1:25
I think there's some relation, but that's a separate risk. And we have to be very aware there are risks in our systems from cyber attacks. And in that circumstance, it was publicly revealed it was a ransomware attack, and that ransomware attack disrupted a Treasury clearing broker dealer. And so the clearing house operated smoothly through that, but for that one clearing broker and its customers, they had to quickly find workarounds.
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Kayleigh Lines2:03
Commissioner Uyeda during the meeting today, to paraphrase his words, essentially suggested we can't pretend this rule is going to solve all the systemic risk present in this market. He mentioned specifically higher interest rates, especially as the Federal Reserve is about to make yet another rate decision today. How concerned are you about higher for longer rates and the potential vulnerabilities it causes in Treasuries?
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Gary Gensler2:24
Well, you'll be glad to hear that I'm going to leave interest rate policy to Chair Powell and his fellow members of the Federal Reserve. But in terms of the US Treasury market, we have seen greater volatility. In fact, we've seen volatility in the markets this year, which are historic. Earlier around the regional banking turmoil at the beginning of the year, more recently even in the longer end of the curve. And so it's really important to look at the leverage in this system, and there's a lot in the relationship between on the one hand banks and broker dealers and on the other hand hedge funds. And that borrowing in the marketplace is part of what this rule today will address, at least bringing the benefits of central clearing that helps lower risk.
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Kayleigh Lines3:23
Well, on the subject of hedge funds, separate news came yesterday when a group of trade groups for hedge funds, including the Managed Funds Association, filed suit regarding two rules the SEC already passed earlier this fall related to short selling and related securities lending. I know you can't comment on a specific lawsuit, but when you think about them collectively, the idea that Wall Street seems to be just taking every rule you pass and taking it specifically to the Fifth Circuit Court of Appeals, how does that make you feel? How does that maybe change how you're thinking?
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Gary Gensler3:53
It's part of democracy, and they have their rights to do that. I feel very confident in the work that the team has put together. The commission reviewed it, went out to thorough public comment. And I would note that these are two rules to promote greater transparency in our market as mandated by Congress after the financial crisis of 2008. Congress mandated that we adopt rules around what's called securities lending and separately around short selling in the markets. And that's what we did based upon public feedback, and I'm very confident in that team's work.
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Kayleigh Lines4:39
But more broadly, beyond just those two rules, when you look at the real litany of court cases the SEC is now grappling with, are you worried that Wall Street is going to continue using the courts to dismantle the work of this regulatory body?
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Gary Gensler4:55
Again, this is not a new feature of our democracy, and it's happened frequently, though it's happened in the past as well. So we put together all that we do according to the legal authorities Congress has given us, and how courts interpret those authorities. We do it based on public comment, and we do it based upon economic analysis. And again, I feel very proud of this agency and the hardworking staff and my fellow commissioners.
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Kayleigh Lines5:28
On the subject of Congress, obviously we're about to head into an election year. There is a chance that come 2025, Republicans can control both chambers of Congress, potentially the White House as well. Does that set a kind of deadline on the work you were doing here, knowing that theoretically within a certain number of legislative days, Congress could have the power to overturn some of your rulemakings? How are you thinking about timeline?
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Gary Gensler5:52
I think of it this way: we have a privilege of service. Somebody like myself, a privilege to service, and it's about doing the maximum good for the maximum number of people. Our clients, so to speak, are 330 million Americans. In the time that we have in these jobs, that's what I'm focused on. And obviously, the commission and the staff of the commission is still hard at work on a number of issues.
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Kayleigh Lines6:15
One of them dealing with a number of filings of spot Bitcoin ETFs. You know, Mr. Chair, I have to ask you this question. There's been a lot...
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Gary Gensler6:23
We did something very significant about the $26 trillion Treasury market, which is really the base of our entire capital markets. It's how we fund our government, it's how our Federal Reserve does monetary policy, it's how we maintain the dollar dominance around the globe. And you want to ask me about crypto? In my defense, Commissioner Uyeda also brought up crypto in his priorities. I mean, the US Treasury market is a very consequential, very important market. Crypto securities are not only much smaller, it's not how we fund our government, it's not how we conduct monetary policy. And for many investors, they've been harmed in that market, and they're being harmed because there's too much non-compliance. And it's not just non-compliance with securities laws, it's non-compliance with a raft of other laws, our sister regulator in the market space, the Commodity Futures Trading Commission, the US Department of Treasury and financial crimes and enforcement. But again, I do ask, and if you look at the focus and the priorities, the US Treasury market and what we did today is really quite important to our capital markets.
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Kayleigh Lines7:43
Absolutely, and that's why we have discussed it. But you are actively engaging with a number of matters related to crypto specifically, so I think, sir, this is fair game, especially when you were having staff meeting with a number of issuers in recent days.
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Gary Gensler7:57
I'm glad that you at least now agree that the priorities were more to the Treasury market. So what is your question about Bitcoin?
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Kayleigh Lines8:06
We have seen in recent days SEC staff engaging with issuers, a number of which have filed for spot ETFs. We've seen a number of amendments to those filings. It seems that market participants in crypto have a sense that we are reaching the end stages here. Typically, is this kind of engagement with the SEC, not prejudging anyone filing, but the level of engagement we are seeing, signifying of things getting easier, closer to resolving, or things getting more difficult?
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Gary Gensler8:30
Again, we have, I think, somewhere between eight and a dozen filings in front of this agency with regard to exchange-traded products around Bitcoin. And the staff of the various divisions respond when market participants have filings. We also had a court case earlier this fall in this regard. And so we do things according to our authorities and how courts interpret our authorities, and that's what we'll do here as well.
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Kayleigh Lines9:04
I think you're referring there to the Grayscale case. Just one final question related to courts. As we talked about, a number of litigation the SEC is already dealing with, there has been a lot of talk about one of your other proposed rule changes related to climate disclosures and Scope 3 being included, potentially unleashing another huge wave of litigation. How is that informing the SEC's thinking as it considers that final rule, and it looks like?
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Gary Gensler9:29
Well, we have right now in our capital markets not just hundreds but probably over a thousand companies today that are already making climate risk disclosures to investors. We have investors representing tens of trillions of dollars of assets under management making investment decisions based on those disclosures. So we put out a proposal about 20 months ago with regard to climate risk disclosures. We got lots of comments, 16,000 comments, so we're still sorting through that. But again, just as I said earlier, if we go forward, because I can't prejudge anything, we will do it based on the law and how courts interpret our authorities.
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Narrator10:20
SEC Chair Gary Gensler speaking with Bloomberg's Kayleigh Lines. For more conversations just like this one, subscribe to the Bloomberg Talks podcast. I'm Charlie Pellett, and this is Bloomberg.