Gary Gensler, chair of the SEC, took center stage at the start of the week at the SIFMA 2024 Annual Meeting in New York and he covered a variety of topics related to the issue of Modernizing Equity Markets. These revolved around equity market structure, clearing, transparency of short selling and securities lending, and digital engagement practices. The transcript of this enagaging speech is available here.

At the end of the session, Chair Gensler was joined on the stage by Ken Bentsen (KB), SIFMA CEO, and the pair sparred amicably over a few burning issues. Bentsen asked Gensler what lies ahead for the Commission in the near future. Gensler replied that almost 80% of the SEC proposals had now been adopted but that work continued on areas such as Treasury market reform, Spacs reform, and Equity markets reform. He said he was proud that 43 proposals have been adopted and only three are in the courts currently.

He estimated that a dozen need to go around again and are back with the Commission for new recommendations. These include predictive analytics, and potentially Reg ATS. Gensler said that Treasury market reform should ensure that Treasuries are not exempt in this sense and will reduce risk and cost if this is remedied. Inter dealer brokers operate a similar function to clearers but are not regulated like clearers and this has caused jitters in markets – a change here would be beneficial.

eDelivery

Bentsen touched on eDelivery and wondered what plans there might be to enable this in the same way as it has been modified in the House. Gensler said that the changes that were driven by the pandemic in 2021 and 2022 had allowed for eDelivery to the SEC ,but Bentsen stressed the bigger piece where benefit could be huge is around BD/IA communications with the public with special focus on confirmations post T+1. He urged the Commission to look at this.

They finished their dialogue on the vexed topic of off-channel communications. Bentsen said that frustration was growing among the regulated as they strive to deal with this successfully. He asked Gensler if we need to consider this area to be a constant liability. Gensler replied that books and records is, and always has been, incredibly important as a control at firms and it has been since the 1930s.

He suggested the SEC and other regulators have solid evidence that off-channel communication is still taking place widely and being carried out by some of the most senior individuals at regulated firms. This is not just for convenience. He reminded the audience and Bentsen that this is how some major scandals were hatched and he specifically referenced Libor and FX. He said the expectation is not perfection, and indicated the regulators’ concern that a large number of senior people are still totally ignoring this requirement. He said this is all about ‘moving this behavior back into the right zip code’.

For now it sounds like this issue remains a constant liability.

Scarlett Johansson

The mood lightened as Gensler spoke about his love of rom-coms and he mentioned that one of his favorities was Her starring Scarlett Johansson and Joaquin Phoenix – which was topical with all the current interest in AI. Gensler stated that AI is going to be so transformative. And for the most part it will bring benign transformation that will significantly increase access to capital and the markets.

He did sound a warning around its potential to engender systemic risk. And also expressed concern that we would end up with a concentration issue around the production of LLMs, predicting that only two providers will dominate this type of AI. He likened the problem to that in the cloud provision market and defined this as a network dependency.