To Restore the SEC’s Credibility, Appoint a New Chair
Economic uncertainty is one of the top issues facing the country today. Many Americans have been forced to rethink their spending habits while concerns about job stability and fluctuating market conditions are leading families to focus more on savings and debt reduction as they prepare for potential financial challenges ahead.
To guide the United States through this tumultuous period, it is crucial to have trustworthy and reliable regulators who can stabilize markets during a crisis and who will collaborate with American businesses throughout such instability. That is why it is difficult to comprehend why Gary Gensler remains President Joe Biden's chair of the Securities and Exchange Commission (SEC). It is even a puzzle why President Biden selected him in the first place.
After a scandal-tinged tenure as President Barack Obama’s chairman of the Commodity Futures Trading Commission (CFTC), Gensler has led a series of gaffe-prone crusades against American companies as SEC Chairman with embarrassing results. A recent study found that most of the flurry of proposed and finalized rules under Gensler was not tied to any authority granted to the SEC by Congress. He has mostly freelanced, letting politics and press releases guide his actions rather than the letter of the law.
Chairman Gensler proposed a climate disclosure rule that required public companies to provide investors with information about climate-related risks and an accounting of carbon emissions resulting from their operations. However, the drafting process lacked transparency, and the language used in the proposed rule was poorly conceived. As a result, the Biden Administration may face legal challenges, and the proposed rule may face an uphill court battle. Gensler's lack of attention to detail, misjudgment of the political climate, and loss of credibility have contributed to the botched process.
On cryptocurrencies, Gensler has fared even worse. He decided early on to be more aggressively anti-crypto than his predecessors, launching a kind of culture war on the industry rather than issuing a proposed rule to govern it. This resulted in a regime of regulation by lawsuit where the SEC attempted to use government power to bully crypto companies into headline-grabbing settlements and to claim victory without going to trial. Like Gensler’s mismanagement of the climate rule, this has also been a failure—and a colossal waste of the agency’s resources.
The first big defeat was in a non-fraud case he inherited against the California-based payments software company Ripple, alleging its sales of the XRP token were unregistered securities. Since becoming SEC Chairman, Gensler has repeatedly argued that all tokens are “digital asset securities” and must be registered in a process he refuses to explain. But unlike previous companies targeted by the SEC, Ripple had the resources to challenge this untenable argument.
The anti-crypto culture warriors from the SEC’s Enforcement Division lost key procedural fights to Ripple and colored so far outside the lines in court that a magistrate judge rebuked them for their “hypocrisy” in failing to show “faithful allegiance to the law.” Ripple’s legal victory last July showed Gensler’s argument wasn’t grounded in the law. It was another blow to his credibility and encouraged other companies he had sued, like Coinbase, to fight back
Gensler’s zeal to show crypto as “rife” with criminality has even undermined the agency’s work on fraud cases. A judge found in December that the SEC lied about nefarious, and ultimately false, activities by another crypto company to obtain an asset freeze order. Facing sanctions by the judge, the agency moved to dismiss the case.
Then there was Gensler’s failure to see any sign of coming disaster during a lengthy meeting with FTX founder Sam Bankman-Fried only months before the digital exchange collapsed from a massive fraud scheme.
The saga of Gensler’s opposition to approving bitcoin spot exchange-traded funds (ETFs) is the most recent, and perhaps most stark, example of why we should be concerned about his stewardship of markets.
After repeatedly denying these applications without providing a coherent justification, one company – Grayscale Investments – sued the SEC. An appellate court in August ruled the agency had violated the law with its “arbitrary and capricious” denial of Grayscale’s application. The court ordered the SEC to come back with a viable justification, but the agency couldn’t.
Instead, Gensler approved Grayscale’s and several other applications adding that he only did so because the appeals court forced his hand. In a lengthy statement, Gensler confirmed that his regulatory vision is unapologetically arbitrary and capricious regardless of what the law says.
The country needs to have a credible and steady hand running the SEC, regardless of which party is in charge. The recent performance of Gary Gensler as SEC Chairman has been a disappointment and raises concerns about his leadership. President Biden and the Democrats in Congress should consider appointing a new Chair to restore the SEC's integrity with a balanced, reliable Chairman.
Todd Tiahrt is a former Member of Congress who served on the House Appropriations Committee which oversaw the funding of the Security and Exchange Commission.
