In remarks before the European Parliament Committee on Economic and Monetary Affairs, SEC Chair Gary Gensler described investor protection implications of evolving financial technologies.
Mr. Gensler described a number of financial stability concerns related to predictive data analytics and digital engagement practices ("DEPs"). He raised questions as to: (i) the balance between investor protection and DEP optimization and data collection efforts; (ii) the effect of a platform's ability to optimize for profit (or some other measure of benefit to the platform) and the impact that may have on investment recommendations made or services provided by the platform; and (iii) the fair access and pricing implications of data analytics models. Mr. Gensler also expressed concern regarding the potential system risks posed by the widespread use of "deep learning models" to the extent that they encourage "herding into certain datasets, providers, or investments."
Mr. Gensler highlighted investment vulnerabilities arising from (i) centralized or decentralized crypto trading platforms, as a result of the absence of "clear investor protection obligations" for such platforms, and (ii) the fact that stablecoin use is at the heart of the crypto market, due to stablecoins potentially enabling bad actors to circumvent AML and sanctions regulations.
Mr. Gensler identified enhanced issuer disclosure requirements as a priority for the SEC, citing his request that SEC staff develop proposals for disclosure requirements pertaining to climate risk, human capital and board diversity, and cybersecurity risks. Mr. Gensler noted that he has directed SEC staff to (i) review funds' climate risk practices and (ii) "consider recommendations about whether fund managers should disclose the criteria and underlying data they use" regarding funds marketing themselves as "green" or "sustainable."
In related remarks to the Financial Times, Mr. Gensler warned crypto trading firms to adhere to the SEC's existing regulatory framework or risk "their own survival." He emphasized that many platforms would be in a better position if they registered with the SEC, given that a substantial number of cryptocurrencies would "qualify as securities."
Commentary
Chair Gensler made clear that he intends for the SEC to be very active in rulemaking, particularly as to new technologies, and in the bringing of enforcement actions. In the disclosure area, Mr. Gensler indicated he will focus on climate change and diversity. Expect a good number of rules to be adopted by 3-2 votes, with the dissents arguing that the new rules are outside the authority of the SEC.
Primary Sources
- SEC Speech, Gary Gensler: Remarks before the European Parliament Committee on Economic and Monetary Affairs
- Financial Times Press Release: Gensler - Crypto platforms' survival requires regulation
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