President-elect Joe Biden on Monday announced the nomination Gary Gensler to run the Securities and Exchange Commission and Rohit Chopra to direct the Consumer Financial Protection Bureau, signaling his intent to aggressively regulate the financial services industry, experts say.
Both of Wall Street’s prospective new cops on the financial beat are already eliciting consternation among some market participants.
Chopra’s nomination “produced groans in the finance industry, much the way the Gary Gensler SEC nomination did last week,” wrote Ian Katz of Capital Alpha Partners in a note to clients. “Perhaps the worst indicator for financials is that Sen. Elizabeth Warren is delighted with the two picks.”
Gensler, a professor at the MIT Sloan School of Management, headed the Commodity Futures Trading Commission from 2009 to 2014, where he helped implement the Dodd-Frank financial reform bill passed in the wake of the financial crisis, and served in the Clinton administration’s Treasury Department from 1997 to 2001. Before his work in government, he was a mergers and acquisitions banker at Goldman Sachs Group Inc.
Despite his erstwhile career on Wall Street, progressive groups cheered his naming, pointing to his record of aggressive regulation of the derivatives market after they were seen as a key culprit for the 2008 financial crisis.
Gensler was an important voice for strengthening the CFTC’s powers to regulate derivatives during the debate over the Dodd-Frank financial reform legislation, and after its passage he forced large financial institutions to trade most derivatives through clearinghouses and make the terms public. He was also a consistent voice for tougher financial regulations during President Obama’s first term, and was said to have clashed with other members who argued for a lighter touch.
“I think he’s going to be a very aggressive regulator, and in these difficult times that’s what the securities markets need,” Howard Elisofon, former SEC lawyer and the securities litigation & enforcement group at Herrick told MarketWatch.
If confirmed by the Senate, Gensler will face a host of tasks that the SEC will have to tackle in coming years, including promulgating rules on how companies must disclose information about their workforces and risks related to climate change. He will also inherit efforts by former SEC Chair Jay Clayton to move markets away from a controversial practice whereby stock exchanges pay brokers rebate fees for directing trades to them.
It is also likely that Gensler attempts to revise the SEC’s “Regulation Best Interest,” which progressives say doesn’t go far enough in preventing financial services companies from selling pricey investments to customers when contrary to their financial interests.
Chopra, who is currently a commissioner on the Federal Trade Commission, will be returning to a CFPB which he helped to stand up in his role of assistant director and student loan ombudsman.
“Rohit Chopra is an entirely mission-driven public official,” who championed student loan borrowers at the CFPB and fought for privacy rights and against monopoly power at the FTC, said Jeff Hauser, founder and director of the Revolving Door Project, which scrutinizes executive-brank appointments. “At every opportunity he has taken full advantage of the powers of his position and has been creative enough to find additional powers within it.”
Chopra will inherit a CFPB that has been “demoralized and weakened” Hauser said, by the directorships of Kathy Kraninger and Mick Mulvaney who “have been emphatic in their opposition to the mission of the agency and have sought to weaken it.”
Indeed, the CFPB was best known during the Trump administration for scaling back rules that constrained the financial services industry, like its defanging of a regulation that forced high-cost payday lenders to make sure customers have the ability to repay loans before issuing them.
Meanwhile, the number of enforcement actions brought by the CFPB in the three years when Trump appointees ran the agency fell to an average of 27 a year, versus 46 in the three years before that.
“Enforcement is a huge priority for all financial regulators,” Hauser said. “Rules only matter to the extent to which there are consequences if you break them. ”
Beyond the powers Gensler and Chopra would have at their respective executive agencies, they will both, if confirmed by the Senate, sit on the powerful Financial Stability Oversight Council, created by the Dodd-Frank legislation to oversee systemic risks to the financial system.
Progressive activists have argued in recent years that the council should take a hard look at climate change and determine that assets which derive their value from fossil fuels or which are imperiled by global warming are inherently risk.
Such a move could incentivize banks to divest of fossil fuel investments and therefore accelerate the economy’s evolution toward renewable, carbon-free energy.
Republicans are wary of growing calls to leverage financial regulations to address issues like climate change. Rep. Patrick McHenry of North Carolina, the ranking GOP member of the House Financial Services called Chopra’s nomination “proof that the Biden team is pandering to members of the far left,” and warned against leveraging the SEC’s power to achieve goals only tangentially related to securities regulation.
“I fear Democrats want to steer the [SEC] away from bipartisan common-ground in an attempt to achieve their most partisan goals,” he said in a statement. “Any future Chair must work within the confines of the SEC’s three-part mission and resist pressure to commandeer our securities disclosure regime to try to fix non-economic issues or social problems better addressed by legislators or other regulators.”
Capital Alpha’s Katz argued that its unlikely Biden would have chosen such progressive figures had the Democrats not taken control of the Senate in the recent Georgia runoff elections, and said that these nominations face a “tough” path to confirmation, with no Republicans likely to support them.
“Some financial firms in the sights of a Chopra-led CFPB might end up haunted by thoughts of Republicans’ epic choke in Georgia,” he wrote.