The SEC Agenda Isn’t Good for the Little Guy

L ast week, Securities and Exchange Commission Chair Gary Gensler appeared before the House Financial Services Committee for the first time since October 2021. Gensler, as usual, referred multiple times during the hearing to his father, who owned a small vending-machine business.

This time, Gensler referred to his father as “Mr. Sam” — drawing a parallel between Sam Gensler and Sam Rayburn, the formidable former speaker of the House who played a key role in creating the Securities and Exchange Commission and who was also known as “Mr. Sam.” Gensler noted that his father was a “big believer in the system of democracy” that could help him as a “small-business owner and as an investor.”

Sad to say, the bipartisan criticisms during the hearing of the SEC’s current agenda show that Mr. Sam likely wouldn’t find much to like as a small-business owner and investor.

As Gensler’s first oversight appearance before the Republican-controlled Committee, the hearing was predicted to be full of fireworks. The SEC’s approach to crypto regulation was a focus of the hearing — and generated the most heated questioning — but the questions about more traditional areas of SEC regulation highlighted the negative impacts of Gensler’s agenda on the little guy.

A common theme, sounded from the right and left, was questioning the pace of the SEC’s rulemaking. Committee members noted Gensler’s SEC has proposed approximately twice as many rules in his first two years as the past two SEC chairs, and he has urged (and provided) less time for public comment for those rules than his predecessors.

There are, at least, two distinct problems here. First, failing to provide adequate time for public comment strikes at the heart of the process Congress has put in place for agency rulemaking under the Administrative Procedure Act, which is supposed to enshrine some of that democratic accountability in which Mr. Sam believed. Gensler’s respect for the process is questionable, but even as he testified about the importance of public comment, his actions in limiting time for comment and in overwhelming the public with interrelated rule proposals make clear that the agency isn’t prioritizing the important input that the public provides to the rulemaking process.

The committee wasn’t only concerned with process; a second issue is that the fast pace of rulemaking prevents the SEC from judging how proposed rules will interact with each other — something the agency has shown little interest in even attempting to do. This increases the potential for major unintended consequences, which can hurt all market participants, from the smallest to the largest.

Many specific rule proposals came under fire during the lengthy hearing. Members, such as Ann Wagner (R., Mo.) and Wiley Nickel (D., N.C.), expressed concerns that the SEC’s equity-market-structure rule proposals — specifically the requirement for retail orders to be sent to auction — would raise costs for individual investors. These concerns are supported by recent academic research that highlights the benefits that retail investors receive from wholesalers.

Gensler also heard bipartisan criticism of proposed rule changes for private-equity funds, which would impose audit requirements, require fee disclosure, and prohibit certain common fund practices. Representative Ritchie Torres (D., N.Y.), citing the high returns that such funds provide for pension funds, worried that Gensler was trying to fix something that wasn’t broken. Andy Barr (R., Ky.) expressed concerns that the proposal will lead to less competition in the private funds market, and Young Kim (R., Calif.) worried that the proposal will make it harder for new funds — with female leadership — to operate.

Those are strikes against small investors who may lose out on higher returns in their retirement savings and against entrepreneurs who will find greater barriers to receiving funding in a less competitive, and less diverse, private-equity landscape.

Gensler also fielded plenty of questions about proposed climate-risk disclosures, including concerns voiced by Representative Joyce Beatty (D., Ohio) that the SEC’s proposed rules will have far-reaching effects on non-public companies, including small businesses and family farms. And that’s to say little of the myriad other items on the SEC’s agenda discussed during the hearing that will have a negative impact on individual investors and business owners. Members criticized the SEC’s lack of focus on capital formation, the barriers that the SEC’s accredited-investor definition places on sophisticated (but not wealthy) investors, and the dangers of the SEC’s Consolidated Audit Trail to investor data security and privacy.

Gensler’s invocation of his father may provide a folksy touch to make his testimony relatable, but the suggestion that Mr. Sam would benefit from Gensler’s SEC agenda falls apart under any sort of examination. The breakneck pace with which the SEC is pursuing this agenda diminishes the accountability of the agency to the public and raises the potential for wide-ranging consequences that put individual investors and small-business owners in a far worse position than they find themselves today.