WASHINGTON, D.C. – U.S. Representative Ritchie Torres (NY-15), as a member of the House Financial Services Committee, today participated in an oversight hearing of the Security and Exchange Commission (SEC) that examined regulatory developments, rulemakings, and activities undertaken by the agency since its last oversight hearing in October 2021 and featured testimony by the Hon. Gary Gensler, SEC Chair.
During the Great Depression, Congress passed the Securities Act of 1933 and the Securities and Exchange Act of 1934, which together created the SEC. Today, the tripartite mission of the SEC is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. It overseas more than 30,000 registered entities, more than $125 trillion in annual securities trading, and reviews the disclosures of approximately 8,700 reporting companies.
VIDEO of Rep. Torres’s five minutes of questioning can be found here.
VIDEO of the full hearing can be found here.
A RUSH TRANSCRIPT of Rep. Torres’s remarks and questioning is below, as delivered:
REP. TORRES: Mr. Gensler, there are areas in which we do see eye to eye. Like the need to disclose climate change risk or the need to understand the immense implications of the unfolding AI revolution. But I’m going to offer, however, observations about three areas about which I’ve heard concern and then have you respond as you see fit. First, on the subject of crypto, the lesson learned from the collapse of FTX is that companies that bare the characteristics of FTX – offshore, deregulated, overleveraged companies – have the greatest risk of losing customer funds. In a world of scarce enforcement resources, one would think that the SEC would prioritize enforcement actions against high-risk companies that resemble FTX offshore, deregulated, overleveraged companies. Instead, it appears the SEC has done the opposite. Instead of targeting an offshore, deregulated exchange like finance, you’ve chosen to target an onshore, regulated exchange like Coinbase. Instead of targeting an offshore, deregulated stablecoin issuer like Tether, you’ve chosen to target an onshore, regulated stablecoin issuer like Paxos. It seems like your enforcement priorities ignore the lessons learned from the FTX failure. Second, on the subject of equity market structure, if a broker sends a retail order to an exchange, the broker would be in compliance with your proposed rule, but if the broker sends that retail order flow to an off-exchange wholesaler, the broker would be out of compliance with your proposed rule even if the wholesaler is offering a better price than the exchange. And therein lies what seems to be the perversity of the proposed rule. It strikes me as perverse to tell a broker you cannot send retail order flow to the wholesaler who’s offering a better price and therefore better execution. On the third subject of private funds, both New York State and New York City Retirement Systems are heavily invested in private funds. The New York State Common Retirement Fund invested about $29.5 billion in PE, and over the course of 10 years, saw an annualized return of 10.12%. The New York State Teachers Retirement System invested $14.7 billion, and over the same period, saw 16.6% in annualized returns. The New York City Employees Retirement System invested $6.5 billion, and over the course of 10 years, saw an annualized return of 15%. So, when I see returns as high as 16.6%, which seemsimpressive, there’s a question that comes to mind – Does the SEC risk fixing what ain’t broken? Those are three observations and you’re free to respond.
THE HON. GARY GENSLER, Chair, Securities and Exchange Commission: Thank you and let me try to do them in kind. In terms of crypto, you’re right that U.S. investors are accessing the crypto markets, both onshore companies and offshore. Our jurisdiction or reach is to both if they’re U.S. investors that are participating in that.
REP. TORRES: But let’s be clear you have the authority to take enforcement action against offshore, deregulated exchanges?
CHAIR GENSLER: It takes longer to build the investigative files. It takes longer sometimes in cooperation with offshore enforcement authorities to pursue that, and it is, frankly, more challenging to actually get subpoenas complied with. And so, it takes it takes longer in time. In terms of your second area about the efficiency of the capital markets, one area is these individual investors and individual investors placing, as you described these market orders. And what we did was put out a proposal and said if that proposal is getting at least the middle of the market, at least mid-part or better, it’s fine, but if these individual small dollar orders were not doing that, either to a regulated exchange or put it into competition. But we’re going to get feedback on it, and it’s one of the four rules we put out. It might be the one that I think we’ve gotten 5,000 plus comments on already…
REP. TORRES: Maybe I’m missing something because you hold the exchange as the gold standard of competition, but if the wholesaler is offering price improvement relative to the exchange, I’m failing to see something.
CHAIR GENSLER: One of the things is…
REP. TORERS: Like if the wholesaler were offering a wore price, then I would consider that a failure of competition and I would see the reason for your rule. But if it’s offering a better price, are we fixing what ain’t broken?
CHAIR GENSLER: Well, so we don’t have a level playing field right now between the dark markets that are
probably a third to a half of the market on any given day…
REP. TORRES: But what you denounce as the dark markets are outperforming what you consider the gold standard. So that’s where I’m confused.
CHAIR GENSLER: Well, I’m saying that the dark markets actually have different rules of the road. They don’t have the same minimum…
Rep. Ritchie Torres: I could talk to you for an hour…
CHAIR GENSLER: So, we’re trying to harmonize that. On your last, oh..
REP. ANN WAGNER: The gentleman’s time is expired