Gary Gensler has presided over 67 rule changes and amassed a record haul of fines since he took the reins of the SEC in 2021. His reform agenda remains extensive and is causing concern in areas of finance previously not subject to SEC scrutiny.
Some worry about regulatory overreach.
Our view is that increased transparency is always a good thing. Conceptually, most would agree, although it’s a little less palatable if you’re one of the Wall Street firms contributing to the $2 billion of settlements wrought from the SEC’s campaign against off-channel communications. “Off-channel” means all business-related texts and calls made from private devices.
While most of Gensler’s reform projects have focused on intermediaries, fresh indications are surfacing of tougher actions being planned for asset managers, notably hedge funds, private equity and venture capital groups.
BlackRock, Blackstone, and Invesco have disclosed that they were contacted in relation to the SEC’s texting investigation, the Financial Times reported at the weekend.
What’s this all about? Ideally, in financial markets all business interactions should be recorded. Use of private devices can hide vital information and hamper SEC investigations. The SEC wants the practice to end.
To the extent that private communications do occur, rules dictate that the content of each message or conversation should be documented for compliance purposes. Firms that fail to keep such records face steep penalties under the current crackdown, which is part of a broader SEC focus of improving transparency in the entire U.S. financial services industry for regulatory oversight.
Gensler's biggest reforms
Gensler has separately proposed the biggest reform of US stock trading in almost 20 years, pushing brokers and market makers to execute deals at the best price available. Early in the year, the SEC also introduced new rules relating to the US Treasury market, which bring high-speed traders and hedge funds under direct supervision and will force more central clearing of trades.
So into this environment then, we return to the crackdown on private communications, which, like a giant purse seiner scouring Manhattan, has already netted upwards of $2 billion in fines and settlements. Bulge bracket sell-side firms typically pay penalties of US$125 million while smaller fry average at about $25 million.
A recent batch of fines included the first-ever settlement with a stand-alone investment adviser, Senvest Management. Thus, even financial advisors are now in the SEC’s net.
The bottom line for asset managers, even very small asset managers, is that the SEC is broadening and strengthening its oversight.
As this expands, asset managers increasingly will be forced to defend the process used to arrive at investment decisions, particularly in cases where companies are found to be fraudulent.
The most important question in these situations will always be: “How did you conclude that XCORP’s accounts gave a true and fair picture of the state of its business?”
We submit that the easiest way to answer this question in the coming years will be simply to say: ”Why sir, I used the Transparently.AI risk score.”
Disclaimer: Views presented in this blog are the author’s own opinion and do not constitute financial research or advice. Both the author and Transparently Pte Ltd do not have trading positions in any companies it expresses a view of. In no event should the author or Transparently Pte Ltd be liable for any direct or indirect trading losses caused by any information contained in these views. All expressions of opinion are subject to change without notice, and we do not undertake to update or supplement this report or any of the information contained herein.
