President Joe Biden has the opportunity to force profound changes on the American corporate sector, and efforts in this direction will take a big step forward on Tuesday morning, when his picks to lead the Securities and Exchange Commission and the Consumer Financial Protection Bureau will participate in confirmation hearings before the Senate Banking, Housing and Urban Affairs Committee.
Gary Gensler, Biden’s choice to lead the SEC and Rohit Chopra, his pick for the CFPB, are darlings of the progressive wing of the Democratic Party, lauded for their willingness to impose tough regulations on financial services firms.
Gensler made his name early in President Barack Obama’s administration, when he helped craft the Dodd-Frank financial reform bill and showed his willingness to implement sweeping new regulations in the face of fierce industry opposition, while Chopra’s history as an Elizabeth Warren ally at the CFPB and the Federal Trade Commission reflects his enthusiasm for aggressive government oversight of business.
Here’s what to watch for at Tuesday’s hearing, scheduled to begin at 10 a.m. Eastern Time:
The ongoing volatility in so-called meme stocks, including GameStop Inc.
AMC Entertainment Holdings Inc.
and Express Inc.
continues to capture the public’s and regulators’ attention.
The House Financial Services committee has already grilled the major actors in the drama, including executives from online broker Robinhood and Reddit, where investors have congregated to promote these stocks, but senators have yet to wade into the issue in a public forum.
Expect Gensler to field questions on the topic of payment for order flow, or the practice by which market makers pay retail brokers to route customer orders their way, in a system critics say creates a conflict of interest.
Analysts at Beacon Advisors wrote in a Monday note to clients that there could be special attention paid to how social media has enabled the runup in prices of many of these stocks, seemingly well beyond what a fundamental analysis of the companies’ performance would justify, pointing to a recent Reuters report that computer bots used social media to promote those stocks in recent weeks.
“Attention from the SEC seems to have moved away from looking to address payment for order flow and instead is now focusing on the way that social media can be used to hype stocks to create a sort of public pump and dump,” they wrote.
Cryptocurrencies like bitcoin
have also ridden growing retail interest to new heights in recent months, and senators will likely be eager to learn how Gensler believes the SEC should be regulating the promotion and sales of these assets.
“Gensler taught a course on blockchain at MIT, so he probably brings more knowledge of the technology that backs crytocurrencies than ay other public official,” according to Brian Gardner, chief Washington policy strategist at Stifel. “We think he will be generally supportive of the sector, but will still look for ways to increase regulation of the asset, including the consideration of additional anti-money laundering rules.
Climate change and income inequality
Progressives are eager for financial regulators to use disclosure rules to promote more sustainable practices by corporations on the issues of climate change and economic and racial inequality.
Acting Chairwoman Allison Herren Lee said last Wednesday that she has directed the agency’s division of corporation finance to review whether public companies are adequately disclosing climate-related risks under guidance issued in 2010, and to prepare to update SEC policy on climate disclosures.
Expect senators to press Gensler on what sort of disclosure rules on climate change and other governance issues he thinks will be adequate to protect investors and the the broader financial system.
CFPB’s enforcement muscle
The CFPB has been gearing up to take a much more aggressive approach to overseeing mortgage lenders, student loan servicers and other financial institutions, even before Chopra’s confirmation. Last month, Acting Director David Uejio published a blog announcing the “new priorities and focus” of the agency, which include actions to help consumers who are suffering from the economic impact of COVID-19.
“I am concerned…that companies are failing to properly administer relief” as mandated by legislation, he wrote, including requirements that mortgage servicers offer distressed borrowers forbearance options. He also expressed concern over banks that garnished stimulus payments in order to cover bank fees or other debts.
Oversight of industry actions on this front could be a preview of the CFPB’s willingness to engage enforcement actions after four years when the agency declined to engage in what critics called “regulation by enforcement.” Chopra’s testimony could provide a window for investors to learn how aggressive the CFPB will be in this regard.
Student loans and mortgage-lending rules
“Chopra was the CFPB’s first student loan ombudsman and the office’s first three annual reports under Chopra all focused on servicing issues in the private-education loan industry,” wrote Edwin Groshans of Height LLC in a Monday note to clients, adding that he expects that a combination of Chopra’s background and push by Senate Democrats to cancel student-loan debt to make this a key topic to watch on Tuesday.
“We expect the CFPB to pursue enforcement actions against [student-loan] servicers that did not disclose all payment options to borrowers,” Groshans wrote, noting that investors in servicers including Navient Corp.
and Nelnet Inc. should pay special attention to the proceedings.