CNBC Exclusive: CNBC Transcript: SEC Chairman Gary Gensler Speaks with CNBC’s “Squawk Box” Today
Q1 2021 hedge fund letters, conferences and more
SEC Chair Gary Gensler says SEC is looking at apps encouraging trading, payment for order flow
SEC Chairman Gary Gensler: There Needs To Be ‘Greater Investor Protection’ Of Crypto Markets
SEC Chairman Gary Gensler On Fallout From Archegos Meltdown
ANDREW ROSS SORKIN: Gary Gensler joins us now in an exclusive interview, his first since taking on the job. Chair Gensler, it’s great to have you on the program this morning. Let’s start if we could by trying to get your thoughts on the Gamestop situation but really because it’s a microcosm of so many things going on in the marketplace all at one time, right, you have sort of the social media enabled interest in this stuff, you have these new apps, the gamification of it, you have these issues about payment of order flow, it captures all of it, but in terms of risk and how you’re thinking about it, what’s top of mind right now?
SEC CHAIR GARY GENSLER: Well first let me say thank you Andrew for inviting me back, it’s good to be back on “Squawk Box” and to see Joe and Becky as well. Look, I think that markets evolve and technology comes along and changes markets on a, on a regular basis, but what we’re seeing in the markets right now, as we’re seeing across the country, in everything that we’re doing is we’re able to use our, you know, our apps, you know god, god bless because we can get so much more access and we’re bringing more access to the capital markets for retail investors, but we also have to look at, for our core principles, our core principles of protecting investors and fair, orderly and efficient markets and capital formation that’s written into the law but it’s, it makes sense today just like it made sense when it was written into the law. And so, how do we update our regime, our reform, reform our rules to still protect investors when these apps are sort of encouraging active trading through the behavioral prompts, and then our whole market structure is starting to see some concentration in it and that could sort of diminish efficiency in our markets.
SORKIN: Well let’s talk about both of those issues. In terms of this issue of gamification and you were asked and talked about this in the hearing yesterday, you clearly have concerns about gamification. The question is to the extent you want to regulate that, how do you do it?
GENSLER: Well it’s about sales practices in the marketing and communication with investors and for a very long time, the SEC and its self-regulatory organization FINRA that you might have heard about yesterday during the hearing have looked at these things so we’re going to seek comment from the public about these new tools, about props and leaderboards and behavioral ways to get individuals to trade more and, and look there is a bit of a conflict of interest. An app that says that they had zero commissions is earning revenue on your trading, the listeners to your show is trading through something called payment for order flow, somebody is paying them for that order flow and paying them for that data. We know this is to be true when we go on any application somebody wants to get our data, but so we’re going to take a look at this and get public comment and then see how we might freshen up our rules.
SORKIN: So Chair Gensler on that issue of payment for order flow, we’ve had Ken Griffin on the program, we’ve had Vlad Tenev from Robinhood on the program and so many others who’ve made an argument that because of the, the lot sizes for retail in the like that they’re actually getting better pricing is the argument they say for their customers. And so that they’re, they’re saying they’re actually not costing the end user. Do you believe that?
GENSLER: Well there’s, there’s evidence that shows that there’s a conflict. We had a case settled in December of last year where the wholesaler in that circumstance actually had written to the broker and said you know there’s a trade off, we could give you more payment for order flow or we could give you better execution for the customers, a clear sort of trade off. And there are brokers that don’t take payment for order flow. And as I noted yesterday, the United Kingdom, Canada has banned it, so we’re going to take a close look as to how the market structure can work best, the most efficient and protect investors.
SORKIN: But in your mind though, do you see solution being the issue of more disclosure meaning as long as the customer knows this as the arrangement, it’s okay, or do you think the possibility of banning it is real and that that might be a better solution?
GENSLER: So, Andrew, we’re still at early stages and I’m at third week in this new job and I’m so privileged and honored to be in this job and President Biden asked me to do it and Senate confirmed. So, I want to hold off on that but I would say this, disclosure alone may not do it. And there’s, there’s, there’s times where there’s an inherent conflict and then thinking about what the market structure can be to be best for investors but also for issuers. See if we have concentration in the middle of our capital markets, concentration tends to lead to higher prices and more fragility and that means even issuers accessing the markets know that there’s a gatekeeper or an individual in that middle that can extract what’s called economic rents.
SORKIN: Chair, you made a point yesterday that Citadel Securities has publicly stated that they effectively execute about 47% of all trades. Is that too much and to the extent it is or something you’re concerned about, what kind of solution do you see?
GENSLER: Well, again, we’re still working on it but I’ll share something else that you or I put a market order and again I doubt any longer because I’m the chair of the SEC but beforehand, but a market order in on a retail platform, the vast majority well over 90% of those go to these wholesalers, it doesn’t go to lit markets like the New York Stock Exchange or the NASDAQ or Chicago Board and so forth. A lot of these are really just going to the wholesalers, and they’re not as lit, they’re not as competitive, so it’s not clear that we’re actually getting best execution in an unlit internalized wholesaler as contrasted to the lit markets.
BECKY QUICK: Hey Gary, it’s great to see you. Thank you for being with us.
GENSLER: Great to be with you Becky. I look forward when we can do this on the stage though.
QUICK: So do we, that would be great. I’d like to ask you a little bit about Archegos and I know that these are all situations that you all are kind of looking into, trying to figure out what happened with it. But with Archegos, it was leveraged that was the serious problem and the Federal Reserve, after the Great Depression, put all kinds of rules in place, put leverage rules in place that used to keep people at about 50%, you couldn’t be levered at more than 50% of course Wall Street since then has found all kinds of ways to kind of get around those rules and one of those is, is total, total return swaps that was the problem at Archegos. I know you can’t comment specifically on Archegos, but what can you say about leverage and about finding ways to, to get much more leverage than the Federal Reserve ever intended and what, what are your thoughts?
GENSLER: I think Becky you raised a really good question. I want to add something I think it was about leverage and also transparency. So when one group in this case it was purported family office but one group wants to express itself in the markets through these derivatives called total return swaps and does it with multiple firms, then it starts to aggregate into significant positions and we have a history in the markets to say if you have significant positions, there’s transparency and the public gets to know if somebody is over 5% or sometimes it’s over 10% of a company and so that transparency was lacking here and you’re absolutely right, also that through these derivative contracts in multiple banks, there was a lot of leverage in that, that trade if I can call it that.
QUICK: So is transparency the problem or is, you know, finding ways around leverage the problem or do you think that those are both things that need to be cracked down on?
GENSLER: We’re taking a close look at both. I asked staff to make recommendations to the full commission under existing authorities to bring more transparency to this derivatives market, but also to look more closely at, at these issues that you raised about leverage. Now, the SEC did have authority, it took, it took a while but did have authority to address the security space swap arrangements. This came out of the Dodd-Frank Reforms and that regime is going into place later this year and then into 2022. So, I think there would be some more transparency, some more control on what’s called margin, which is a part of this leverage calculation. Those rules have not yet gone into place but I think we’ll need more transparency than is even in those rules.
QUICK: And one more question on this, it seems like some of the rules were flouted to the filings that were supposed to be made were never made by that family office. Are you going to be looking at enforcement for these family offices that are basically hedge funds that have tons of money and just don’t seem to be following the rules that already exist?
GENSLER: Well you can imagine I can’t speak to a specific matter but in general, we’re going to examine and enforce the rules without fear or favor. We’re gonna look at individuals and corporations and yes that includes hedge funds, but of course I can’t speak to any one individual matter.
SORKIN: Gary, I wanted to pivot to the issue of crypto something you’re very familiar with you, you taught a whole class at MIT about crypto and thus far the SEC has not gotten into the business of trying to regulate it, you’ve made some comments that you think that Congress ultimately will have to do it. What do you think to the extent that it should be regulated, how would you do it? What are you thinking?
GENSLER: Well, so you’re right, I was honored to teach not just one but multiple levels of different courses in financial technology and in cryptocurrency and blockchain technology. I think to the extent something is a security, the SEC has a lot of authority and a lot of crypto tokens, I won’t call them cryptocurrencies for this moment, but crypto tokens are indeed securities. The prior chair had indicated that, the prior SEC brought numerous enforcement actions to sort of bring some of those security or investment contract tokens to enter the rules but there are some, like Bitcoin if I can just focus on that and that’s about half of this $2 trillion asset class right now, it’s a digital scarce store value but highly volatile and there’s investors that want to trade that and trade that for its volatility in some cases just for it’s, it has lower correlation with other markets. I think that we need greater investor protection there and we don’t have a federal regime overseeing the crypto exchanges, so if an investor wants to trade on that Bitcoin, understanding it’s highly volatile, highly speculative, but if they want to trade on that, that we have in place some investor protection and that’s what I was saying I think is a gap in our system right now.
SORKIN: But it’s a gap in our system that needs to be addressed by whom? Is that something that Congress will have to address because it’s very possible Congress won’t address it and if they don’t, is that something that you think you have you have an angle to address?
GENSLER: Well I think that as it relates to Bitcoin and I’m not speaking to all, all the other tokens right now but as it relates to Bitcoin, while our sister agency, the Commodity Futures Trading Commission has limited anti-fraud and anti-manipulation authority, there’s no federal authority to actually bring a regime to the crypto exchanges. Whether it’s stock exchanges or, or futures exchanges, there’s regimes that were put in place in the 1930s to help protect against fraud and manipulation on the exchanges and protect the integrity of that. And I think that’s really something that we’ll be working with Congress and if they see fit to try to bring some protection for people that want to invest in this speculative asset class.
SORKIN: In terms of that protection though, how do you think of the role of social media. I mean this goes back to Gamestop but also you’re seeing it in crypto, Elon Musk is going to be on SNL this weekend. We’ve watched Dogecoin nearly double over the week as people speculate that he’s going to do a segment or a skit around that. He’s been on Twitter talking about these things, what do you think of the celebrities taking to Twitter, you know, we’re looking at a tweet right now, “Let’s find out how just how live Saturday Night Live really is.” And literally just on the backs of these kinds of communications, you’re seeing stocks move, you’re seeing crypto move. When you think about investor protection, what do you do about that, if anything?
GENSLER: So I think that we’ve lived every, every decade we get new technologies, there were debates a hundred years ago whether to allow a telephone on the floor of the New York Stock Exchange and here we’re in the 2020s, we need to update and freshen in our rules to ensure that, well, retail investors and any individual as a first amendment right to speak and so forth that they’re not misleading the public, they’re not manipulating the public, manipulating the markets. In the securities field, we have a lot of authorities to do that. In a number of these crypto fields, not so clear, if it’s Bitcoin for instance, which has been deemed not to be a security but I do think that we’re going to be freshening up our rules and really hearing from the public. I think that the community and the social media is good but let’s recognize also that now computers can train on that social media, do something which is called sentiment analysis this is computers watching our words. In fact, this interview right now probably is being interpreted in sentiment analysis meaning a computer somewhere is taking Andrew’s and my words and saying, what does it mean for the markets now the stock market’s not yet open but what does it mean for the markets?
JOE KERNEN: Hey Gary, I don’t know how far you want to go on this. Just take yourself away from SEC chair for a second and just as a guy who taught a course, courses at MIT and I guess you didn’t teach a course, you didn’t call the Bitcoin or crypto course Ponzi scheme or Tulip mania or it was on crypto so, and we have a lot of uninformed opinions, people call it a Ponzi scheme, people say, just takes the greater fool theory someone has to pay for it there’s no inherent value. Just as someone who knows how it works, you called it a store of value, were you just referring it to that as a perceived store of value or in your view, is the mechanism itself, does it imbue Bitcoin with, with, with actual value that people now ascribe that it’s similar to digital gold in your view?
GENSLER: So, I think what’s important at the SEC is to be technology neutral and still stay to our core principles of protecting investors capital formation and those efficient markets. In that sense and working with Congress, I’m saying, I don’t think there’s that investor protection for Bitcoin investing at this point in time. Now, how has it been perceived by investors and what did I teach at MIT before this is that it’s a digital scarce speculative store of value. It could go to zero or it could go high and that’s, that’s the nature of it, but I think bringing investor protection to that market is relevant if this is going to continue and it brings confidence and trust to investors in overall markets. We found that in the equity markets, we found that in the bond markets that when we bring investor protection to those markets and we try our best within our resources to tap out fraud and manipulation and other bad actors, that’s good for capital formation.
KERNEN: Gary, it’s on some corporate balance sheets as a alternative to cash. And, you know, when I hear Fed Chair Powell or Treasury Secretary Yellen talk about it I hear one thing, which would make me think you’d have to be absolutely insane to put hard earned corporate dollars is, you know, a CacheManager to put it in that. Can you give us any more than it could be worth zero or it could be worth a million?
GENSLER: You know, no I, Joe, there are other guests you’re gonna have one for the next four years or however long I’m graced to be in this job, I’m not going to speak about valuations, that’s your other guests.
KERNEN: I just figure MIT you know you’d know other blockchains for you know, I think, you give it the slightest little bit of an endorsement I’m not gonna get that from you.
GENSLER: I know I got the tease that you’re trying to give me but it’s not my job right now but what I would say is important is disclosure you mentioned corporations disclosure that’s been our hallmark for 90 years of our capital markets that a company discloses what’s relevant to investors and that’s, we’re also, it’s, it’s critical that whatever that disclosure is, is accurate, not misleading and doesn’t leave out material emissions.
SORKIN: And Chair Gensler, help us with this. Maybe it’s a, I’m just curious actually about your philosophy when it comes to investor protection because right now, there’s such a divergent view of what investor protection means there’s a lot of people who look at the interest in the markets and say it’s really exciting you hear that there’s younger people that are getting in the markets that hopefully they’re learning about the markets that this is going to help the markets longer term. There are people who say actually there should be less investor protection just to some degree, and in fact the investor protections that we’ve historically have, have had have actually not protected the retail but they, they’ve always protected the establishment, you hear that all the time the suits if you will and I, we’ve, we’ve been criticized on this very program for talking about that or for trying to quote unquote, try to protect the investor the way we’ve talked about historically, how do you think about that right now and also the idea that certain investors have access to certain types of products that others don’t?
GENSLER: Well I don’t know whether you were commenting that I should take off my jacket and you guys aren’t wearing one but, but to get your question at the core, I think investor protection has helped economic growth. I think that investor protection has helped capital formation because it, it builds trust and confidence in our financial markets and I think it lowers what’s called the risk premium, it lowers the risk that somebody is defrauding the investors. Now investors can take risks, that’s, that is at our core of our sort of public policy, investors can take risk as long as they have that disclosure all of those what’s called material disclosures from an issue or somebody raising money, somebody investing, and that that those disclosures be kept current and they are updated as we know quarterly and annually and the like. That’s, that’s how I think of it, I think about the exchanges where there’s not that protection yet on the crypto exchanges but on the exchanges to ensure that there’s integrity, and then if somebody says there’s a bid or an offer, it’s real. And then thinking about this market structure and these events around January’s volatility, is it the most efficient market meaning does it help lower the cost for a lot of competition. Competition and transparency is contrasted to darkness and concentration. So, that’s the balancing but bring transparency and competition in markets, It’s good for investors, it’s good for issuers.
QUICK: This one’s a little theoretical, you know, the biggest issue for regulators is trying to see things before they happen and regulations often are only put in place after there’s a crash, after there’s a fiasco, after there’s a situation where people lost a lot of money. It’s just natural because there are so many lobbying organizations, so much, so many block blocks that are put up to try and keep the system status quo and as it is but if you were looking out there, if there’s one or two things that, that you’re most concerned about we did hear from the Fed yesterday that they’re concerned about asset prices dropping really rapidly as they’ve gone up so quickly, if there’s one or two areas that you’re really concerned about maybe preventing things before there’s a crash before there’s a big problem, what would they be?
GENSLER: Well I think the heart of yesterday’s testimony was trying to get ahead, technology has been a good thing, bringing a lot of access. It’s easier user interfaces on our mobile apps, not just in finance. That that’s, that’s generally been a positive outcome but to guard against that we don’t lull ourselves into a place that we’re not protecting investors and we’re not insuring for that market integrity that I mentioned earlier. So, I think it’s, it’s good working with the staff and my fellow Commissioners to get ahead of that. I also think disclosure that we’re in a new decade and investors want to understand more information about climate risk and human capital and the drivers of value inside of the businesses and the drivers of risk inside of the businesses. So, these are a number of the areas that we’re that we’re going to be spending a fair amount of time with.
SORKIN: Chair Gensler, we want to thank you for being with us. We hope you come on back because I do want to talk about climate, we have about a million questions about SPACs that we want to get to. And I’ll leave you with this, are you going to be watching Saturday Night Live on Saturday night and if so, you have a message for Mr. Musk?
GENSLER: I don’t know whether I’ll be watching Saturday Night Live, but I have no messages for any, anybody that’s on the show they, I’m sure that they’ve got enough but consultants to advise them.
SORKIN: Chair Gensler, we appreciate you being with us and we, again, we look forward to seeing you in person very, very soon.
GENSLER: Alright, thank you Andrew, Becky and Joe.
