SEC’s Gensler Asks Congress to Fund Crypto and AI Enforcement

For the last few months, Gary Gensler, chair of the Securities and Exchange Commission (SEC), has been calling for more regulation and promised to step up enforcement actions to protect investors. Yesterday, he asked Congress to help him fund these efforts. Gensler also explained the areas where these funds would be assigned — crypto, unsurprisingly, is one of them. 

In two different events on Tuesday, May 17, Gary Gensler explained first the need for the SEC to continue monitoring markets and enforcing securities laws, and second the additional funds necessary to cover these efforts.  

At the 2022 NASSA Spring Meeting, the SEC’s Chair warned investors about certain digital engagement practices that could create conflicts of interest and biases. New technologies like predictive analytics and machine learning have brought new tools like robo-advisors, brokerage apps and wealth management apps that offer useful services to clients, but they also raise a number of questions, according to Mr. Gensler. For instance, when they use certain digital engagement practices to entice investors to use their services or add new products, Gensler asked if they acting in the client’s best interest. The SEC needs to make sure that companies comply with the laws, and they don’t use new technologies to improperly nudge investors to do things they don’t really want to do. 

Behavioral nudging — when an app is designed to influence consumers’ behavior — is an area where the agency may be digging. The agency already adopted two rules in 2019, Regulation Best Interest for broker-dealers and an interpretation of the fiduciary standard for investment advisers. Yet, Mr. Gensler announced that he has asked the agency’s Divisions of Investment Management, Trading and Markets, Examinations, and Enforcement to ensure that investment professionals live up to these obligations. This includes ensuring that brokers and advisers will need to prevent their own interests from inappropriately influencing their recommendations and advice.

Another area of concern for Mr. Gensler is the concentration in the market of data analytics, in particular in the back end of brokerage apps. This could raise issues of financial stability, Mr. Gensler argued, and that’s why he also asked his staff to examine how to improve efficiency and competition in the markets. 

Budget Increase 

For all the initiatives that the SEC wants to engage in, the agency needs a boost in its budget to cover the additional costs, and this is what Gary Gensler asked for yesterday in a hearing before the Subcommittee on Financial Services and General Government U.S. House appropriations Committee. 

Gensler explained to the House that in order to maintain the “gold standards” that the SEC has, they need more staff and resources — and right now the agency has 4% fewer staff than it did in 2016. “As our capital markets have grown, this agency has shrunk,” Gensler said. Although he mentioned crypto as an example of how the oversight responsibilities have increased, crypto was not the only market to blame: cybersecurity risks, new private funds and investment advisers also increased the annual bill for the SEC. 

For the fiscal year 2023, the SEC is requesting an 8% increase over FY22. This would mean around 400 new staff, 90 of those to be assigned to the enforcement and examination divisions, the “cops on the beat and eyes and ears on the ground,” as Gensler described. 

The SEC’s Chair predicts that enforcement actions will continue and sanctions may also be higher. This will likely end in more cases being litigated and going to trial. The additional staff will strengthen the agency’s litigation support and bolster the capabilities of the Crypto Assets and Cyber Unit, Gensler told the committees. 

Read more: SEC Chair Steps up Crypto Crusade, Sends Message to CFTC