Washington—Wall Street’s new director outlined an aggressive regulatory agenda that could put pressure on the financial industry’s profit margins.
Securities and Exchange Commission Chairman Gary Gensler is working on stricter regulations for high-speed trading companies, private equity managers, investment trusts and online brokerage firms. With less than six months of employment, Gensler says he wants to reduce capital market costs for fund-raising companies and ordinary investors saving for retirement. Its main goal is to assert that benefits and salaries, known as economic rents, exceed what a purely competitive market allows.
“We want to tackle and reduce rents in the capital markets,” Gensler said. He noted that finance as a share of US economic output has more than doubled since the 1950s, which is about 8% of GDP today.
“If we get back to normal, it will be a huge savings,” he said.
Enforcing regulation risks compounding some of Wall Street’s most profitable business models. Some Republicans have accused him of being overkill. People close to the industry say Gensler’s plans are likely to be opposed. However, the SEC has not made formal proposals for most of its agenda items, and few industry representatives have been willing to publicly criticize them.
“I think it’s a lot easier to be paternal than anyone who falls into one of these regulatory roles,” Republican SEC commissioner Hester Pearce said. “That’s why we need to protect ourselves from that trend, because we all think we all know what’s best for everyone else.”
As chairman of the Commodity Futures Trading Commission (CFTC), Gensler established his reputation as a hard charge regulator between 2009 and 2014. Despite Wall Street’s legal opposition, they have dozens of rules governing the huge swap market that was previously largely unregulated and contributed to the 2008 financial crisis. had made.
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The much larger agency, the SEC, has been working remotely since Gensler took office in April. Leading 4,400 employees from the bedroom of a 135-year-old home north of Baltimore, Gensler, 63, brought together policy professionals, lawyers and economists to discuss nearly 50 rule-making items. I wrote a suggestion. Agenda
Gensler is a critical scholar and policy advocate from a progressive lobbying group, rather than choosing senior staff from within the SEC or from large corporate law firms, as many of his predecessors have done. is captured. One example is Barbara Roper, a longtime proponent of stricter rules for stockbrokers, and Gensler tapped into a senior advisor focused on investor protection.
Perhaps the biggest battle he has chosen is over the stock market plumbing, where a few large companies do most of the individual investor transactions.
Under an arrangement known as order flow payment, brokerage firms such as Robinhood Markets Ltd.
Send multiple client orders to high speed trading companies such as Citadel Securities and Virtu Financial Ltd.
not stock exchange. High-speed traders pay brokers for orders and profit from the difference in the buy and sell prices of the shares being traded.
A practice that the SEC approved decades ago has, in recent years, allowed many brokers to stop charging transaction fees from retail investors. Citadel Securities and Virtu say they often trade at slightly lower prices than the exchanges, saving investors money.
“The concerns about concentration and conflict are theoretical,” said Virtuo CEO Douglas Schiff. “The actual results are highly beneficial to individual investors.”
However, Gensler and other critics say that payment of order flows creates a conflict of interest for brokers and reduces market transparency by moving data away from exchanges. He said he was ready to ban it completely in August, a statement that caused shares in Robinhood and Birtu to drop.
Chris Ecovella, who works with Gensler at the CFTC and now runs an industry association that represents regional brokerage firms, said: “They will do everything they can to avoid changing their business model. Huh.”
Gensler is also investigating a new generation of brokerage firms like Robin Hood. Instead of human brokers taking orders from clients and recommending investments over the phone, they use data analysis to examine customer behavior. Their algorithms can generate messages for individual clients and influence investment decisions through push notifications and other features.
“While these developments can increase access, increase options and reduce costs, they also raise new questions about potential competition, data bias and even systemic risk,” Gensler said. told the Senate Banking Commission in September. ..
Robin Hood is looking forward to working with the SEC and says the platform has given millions of first-time investors access to the stock market.
Gensler also indicated plans to request more information from fund managers who offer products that claim to be environmentally or socially responsible. Public interest in addressing issues such as climate change and racial inequality is a constant for so-called money managers, who have seen their fees drop as investors shift to low-cost index funds over the decades. We have made potential investment a source of growth.
The problem, according to Gensler, is that funds don’t use consistent indicators to back up their marketing claims, making them difficult for investors to compare.
Conservatives say some of Gensler’s plans could undermine his goal of saving investors’ money. For example, regulations that require more disclosure from companies about risks from climate change could ultimately affect companies with higher compliance costs borne by shareholders.
Gensler, a former Goldman Sachs group banker, has decades of skepticism about Wall Street. After working for President Clinton’s Treasury from 1997 to 2001, he and his former aide Gregory Bear co-authored a book called “The Great Mutual Fund Trap” in 2002. In it, he criticized professional stock pickers for high fees, low returns, and low returns. Urged savers to buy index funds instead of actively managed investments.
“Don’t believe your interests are the same as your broker’s,” Gensler and Byers wrote. “In most cases … expert wealth management advice can help investors underperform the market and prosper on Wall Street.”
As SEC chief, Gensler is currently considering similar fees charged by private equity firms. The SEC has traditionally considered large institutions such as pension funds to be more sophisticated than individual investors, but Gensler said these investors in private equity are by more disclosure. He said he could make a profit.
“If there are fewer private-equity funds, there will be more pension funds,” Gensler said. Now, there may be some more private equity general partners. “
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