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Gary Gensler Alex Wong/Getty Images News/Getty Images
Gary Gensler

Fiduciary Advocates Hail Biden's Pick for SEC Chair

As chair of Maryland's Financial Consumer Protection Commission, Gary Gensler advocated for a client-first fiduciary standard for broker/dealers as well as 'anyone who holds themselves out as an advisor.'

President-elect Joe Biden officially named Gary Gensler as his nominee for chairman of the Securities and Exchange Commission on Monday, confirming previous reports. If confirmed by the Senate, Gensler would join the other four commissioners and take over from Jay Clayton, who left the position at the end of last year. Gensler's nomination was among a number of announcements on the administration's posts, including the choice of Rohit Chopra as director of the Consumer Financial Protection Bureau.

"These tireless public servants will be a key part of our agenda to build back better — and I am confident they will help make meaningful change and move our country forward,” Biden said in a statement about the announcements.

Gensler's agenda will no doubt affect advisors, from assessing Regulation Best Interest’s efficacy to determining changes in the commission’s Enforcement Division.

Biden's choice is being praised by many client advocates, from securities attorneys to investor protection proponents. Those who support a stronger client-first standard for broker/dealers and investment advisors point to Gensler’s recent history chairing the Maryland Financial Consumer Protection Commission from 2017 to 2019; there, he argued for higher standards for broker/dealers and investment advisors. Later, as Obama's chair of the U.S. Commodity Futures Trading Commission (CFTC), he managed to impose tougher rules on the comparatively freewheeling over-the-counter derivatives markets.

Yet he also has a long tenure on Wall Street; In 1979, Gensler joined Goldman Sachs, spending 18 years with the firm and ending his tenure as the co-head of finance, in charge of its worldwide controllers and treasury efforts, according to Gensler’s biography at the MIT Sloan School of Management, where he works as a professor of the practice of global economics and management.

He later was assistant secretary of the Treasury during the Clinton administration, and worked as a senior advisor for Sen. Paul Sarbanes during the crafting of the Sarbanes-Oxley Act, which aimed to protect investors from fraudulent company reporting in the wake of the Enron and WorldCom scandals in the early 2000s. Later, President Obama selected him as chairman of the CFTC, overseeing reforms and new regulations affecting the country’s $400 trillion swaps market. He currently is a member of the New York Fed Fintech Advisory Group.

A. Valerie Mirko, a partner with Baker McKenzie, said Gensler’s approach would include an aggressive enforcement stance but not a needlessly antagonistic one.

“He understands the balance of interests, understands how financial institutions work, and understand the cost Reg BI had on the industry in terms of compliance,” she said. “The SEC is going to have a very deliberate, thoughtful Chair who will want to understand all options and want to be strategic about how to move forward on this.”

Gensler’s first steps will be to fill the role of enforcement director; both Stephanie Avakian, the commission’s co-director of enforcement since June 2017, and Deputy Director Marc Berger, who stepped in as an interim head of the department after Avakian’s departure, have left the SEC.

Nicholas Morgan, a partner in the litigation department at Paul Hastings, said it’ll be “key” to see who Gensler selects but couldn’t yet discern what Gensler’s preferences would be. Barbara Roper, the director of investor protection at the Consumer Federation of America, also expected a proactive stance on enforcement measures.

“I would expect him to bring a strong approach to enforcement, to have a strong Enforcement Director, and give them leeway to bring enforcement actions that have impact,” she said. “But I don’t expect him to go off half-cocked on anything.”

Several analysts, including Ashley Ebersole, a securities enforcement and regulatory partner with Bryan Cave Leighton Paisner, pointed to Gensler’s CFTC tenure to suggest he would not hesitate to tackle the regulation of complex securities. Gensler’s management of rules for swaps was particularly fraught, as he was imposing regulation in a space where it had previously been nonexistent.

“His regulatory approach to swaps is a good indicator of how he may approach more esoteric instruments at the SEC, including digital assets,” Ebersole said. “This would be a positive development for those who believe the lack of regulation is hampering growth of the digital asset space.”

Roper said she was optimistic about Gensler’s nomination, calling him a “terrific choice” and a boon for investors. She acknowledged how challenging the new role would be, particularly as much of the rulemaking under previous Chair Jay Clayton’s tenure deserved reassessment.

“So it’s not a job for the faint of heart, and Gary Gensler is a seasoned regulator. He knows how to run a regulatory agency,” she said. “He largely completed a demanding rulemaking agenda (at the CFTC) in the wake of the financial crisis. He was able to do most of it with some Republican support, but is not afraid to take partisan votes when he has to.”

Morgan expected several other contrasts with Clayton’s tenure, including a pendulum swing further in the direction of high penalties being employed as a deterrent against misconduct, and a boost in the number of “whistleblower retaliation” cases against companies that acted against employees who alerted the SEC to potential misdeeds.

But he thought there may be more continuity than expected between Clayton and Gensler, and contrasted their backgrounds with previous Democratic Chair Mary Jo White, whose prior experience was as a criminal prosecutor.

“One thing Clayton and Gensler have in common is an intimate knowledge of the inner workings of the capital markets, Chair Clayton because of his background in law, and Gensler because of his background in public and private service,” he said. “They both have a ‘wonky’ interest and fascination in the intricacies of how the capital markets work.”

Proponents for a uniform fiduciary standard who fault Reg BI for falling short of this goal point to Gensler’s recent tenure as chair of the Maryland Financial Consumer Protection Commission as a sign of his interest in pursuing such a standard. That commission’s final report from Jan. 2019 recommended that the state’s General Assembly pass legislation that broker/dealers or anyone “who offers advisory services or holds themselves out as advisors, consultants, or as providing advice, would be held to a fiduciary duty to act in the best interest of the customer without regard to the financial or other interest of the person or firm providing the advice.” Several state senators presented legislation that would enact such a standard, but it died in a committee vote later that year.

The commission’s findings offer hope to those expecting a new SEC chair to reconsider Reg BI and the need for such a standard, though Mirko cautioned that Reg BI was more set in stone compared with other Trump-era rules passed near the end of his administration that are in greater danger of being overturned. Morgan felt that Gensler’s prior comments and experience suggested he was an “unambiguous yes” in support of a uniform standard, and that brokers should expect the commission to move further in that direction.

He speculated the commission could use more aggressive enforcement approaches and additional staff guidance to move Reg BI closer in the direction of being a uniform standard in practice, but Gensler’s tenure at the CFTC suggested he would not shy away from new rulemaking, either.

“The writing’s on the wall,” Morgan said. “How we get there is not as clear.”

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