Popular Blog Post: Gensler Testifies at House Financial Services Committee Oversight Hearing

This week, the Forum News Feed will highlight popular posts over the last few months. We will return with new content beginning on Tuesday, September 5.

In April, Securities and Exchange Commission Chair Gary Gensler testified before members of the House Financial Services Committee as part of the Committee’s oversight process. In his written remarks, Chair Gensler noted “Money market funds, which can operate as deposit alternatives, have grown more than $660 billion just since last June, from about $5 trillion to about $5.7 trillion,” adding this growth underscores, “why it’s so important to ensure that these key parts of our capital markets are resilient.” He noted the SEC has worked with the U.S. Treasury staff and Federal Reserve staff to address the Treasury markets, noting “markets and financial products are priced off of treasuries.” The hearing itself focused mostly on the Commission’s enforcement in the crypto markets, ESG disclosure proposals, equity market structure proposals, and the Commission’s rapid pace of rulemaking. Notably, Chair Gensler last appeared before the Committee on October 5, 2021, approximately 18 months ago.

Many members of the Committee noted the pace of rulemaking and the short comment periods are making it difficult for market participants to keep up. Additionally, a few Members of Congress pushed back against the Commission’s open-end fund proposal which would mandate swing pricing, impose a hard close, and change liquidity management provisions for funds. Capital Markets Subcommittee Chair Ann Wagner (R-MO) stated the Commission’s liquidity proposal for open-end funds “would require funds to assume a worst-case scenario of a 10% sell-off on the fund when classifying the liquidity of assets” she added that in conversations with fund complexes “a 10% run would be a magnitude higher than any they have seen in recent history…” She noted that according to one asset manager, the highest they had experienced was going back to the 2008 crash and it was 2%, she asked the Chair what historical data the Commission relied upon in determining to use the 10% figure. Gensler noted that this was related to the bucketing of assets among highly liquid, middle liquid, illiquid assets and added that the SEC laid it out in their proposal, he stated he would need to circle back on more specifics.

Representative Zach Nuun (R-IA) focused on the hard close and swing pricing portion of the Commission’s open-end fund proposal. He stated, “I am very concerned with swing pricing proposals that draw strong opposition from both industry and consumer advocates,” noting that the proposal would create a “two-tier market.” He added the proposal would benefit sophisticated investors at a cost to retail investors, quoting the SEC’s own release that states middle class investors may lose their ability to manage their investment through the close of the stock market each day. Gensler stated the SEC is trying address systemic risk, adding that in times of stress the open-end bond fund community has called on the Federal Reserve for assistance and they are trying to lower the risk in bond funds. Representative Nunn emphasized no funds have used swing pricing since the SEC’s authorization in 2016. Gensler added the American public is “holding this stress risk” that the Federal reserve may need to support the overall collective investment vehicles.

Additionally, Representative Steven Horsford (D-NV) pointed out that a hard close would likely lead to a “bifurcated market where sophisticated investors will be able to utilize more information and lock in the day’s price while others are forced to trade early in the morning.” Representative Young Kim (R-CA) noted her concerns with the “frantic pace, limited comment periods, and complexity of the rules proposed” in her questioning of Chair Gensler. She further noted on the hard close proposal that this would “force investors to put in orders or redeem funds as early as 10am ET in order to get that day’s price” noting that her constituents in California would have to place orders even earlier than that. Gensler responded that “it is the biggest institutions that are sometimes anticipating that the Federal Reserve will come to their support,” adding, “in times of stress open-end bond funds have made such calls to the US Federal Reserve.”

Click here to read Chair Gensler’s written testimony.
Click here to watch the House Financial Services Committee hearing.