SEC’s Gensler Wants to Save Investors Money by Squeezing Wall Street

I hope we address and try to lower economic interest rates in our capital markets, Mr Gensler said. He noted that finance as a share of U.S. economic output has more than doubled since the 1950s to about 8% of current gross domestic product.

If we ever get back to what it was, he said, that’s a lot of savings.

Regulatory pressure threatens to shake up some of Wall Street’s most lucrative business models. Some Republicans accuse him of overreach. People close to the industry say Mr. Gensler likely to lead to opposition. But because the SEC has not made formal proposals for most of its agenda, few industry representatives have been willing to publicly criticize it.

I think it’s very easy for anyone who gets into one of these regulatory roles to become paternalistic, said Republican SEC Commissioner Hester Peirce. And so we have to guard against that tendency, because we all think we know what’s best for everyone.

Mr. Gensler built a reputation as a tough regulator during his 2009-14 stint as chairman of the Commodity Futures Trading Commission, or CFTC. Despite legal opposition from Wall Street, he wrote dozens of rules to govern the massive swap market, previously largely unregulated and contributing to the 2008 financial crisis.

The SEC, a much larger agency, has been working remotely since Mr. Gensler took over in April. Gensler, 63, leads his 4,400 staffers from a bedroom in his 135-year-old home north of Baltimore and has brought together policy experts, lawyers and economists to write proposals for each of the roughly 50 regulatory items on his agenda.

Rather than select senior staff from the SEC or major law firms, as many of his predecessors have done, Mr. Gensler held important positions with academics and policy advocates from progressive lobby groups. One example is Barbara Roper, a longtime advocate of tighter brokerage rules, who was approached by Mr. Gensler as a senior advisor focused on investor protection.

Perhaps the biggest battle he’s fought is over the plumbing of the stock market, in which a handful of large companies execute a majority of individual investors’ trades.

Under an arrangement known as order flow payment, brokers such as Robinhood Markets Inc.

send lots of client orders to fast trading companies like Citadel Securities or Virtu Financial Inc.

instead of going to a trade show. The fast traders pay brokerage for the orders and profit from the difference between the buy and sell price of the stocks being traded.

The SEC previously approved the decades-old practice that has seen many brokers stop charging trading commissions from individual investors in recent years. Citadel Securities and Virtu say they often trade at a slightly better price than exchanges, saving investors even more money.

Concerns about concentration and conflict are theoretical, says Douglas Cifu, the director of Virtu. The actual results are overwhelmingly beneficial to individual investors.

But Mr Gensler and other critics say payment for order flow poses a conflict of interest for brokers and reduces transparency in the market by diverting data away from exchanges. He said in August that he was open to banning it altogether, a comment that sent Robinhood and Virtu’s shares plummeting.

You have some big players here whose entire business model in the stock market is based on current rules, said Chris Iacovella, who worked with Mr. Gensler at the CFTC and now leads a trade association representing regional brokers. They will do everything in their power not to have to change their business model.

Mr. Gensler is also researching the new generation of brokers such as Robinhood. Instead of human brokers taking orders from customers and recommending investments over the phone, they use data analytics to study how customers behave. Their algorithms can tailor messages to individual customers and influence investment decisions through push notifications and other features.

While these developments… may increase access, increase choice and reduce costs, they also raise new questions about potential conflicts, bias in the data and yes, even systemic risk, Mr. Gensler told the Senate Committee in September. for banks.

Robinhood has said it looks forward to working with the SEC and that the platform has made the stock market accessible to millions of new investors.

Mr. Gensler has also signaled plans to demand more information from fund managers that offer products that they claim are environmentally or socially responsible. Public interest in tackling issues such as climate change and racial inequality has made so-called sustainable investing a growing source of profit for money managers who have seen their fees plummet amid decades of investors’ shift to low-cost index funds.

The problem, says Mr. Gensler, is that the funds don’t use consistent metrics to back up their marketing claims, making it difficult for investors to compare them.

Conservatives say some of Mr Gensler’s plans could undermine his goal of saving investors money. For example, rules requiring companies to be more public about the risks they face from climate change could saddle companies with higher compliance costs, ultimately borne by shareholders.

Mr. Genslers, a former banker of Goldman Sachs Group Inc., has been skeptical of Wall Street for decades. After serving in President Clinton’s Treasury Department from 1997 to 2001, he and a former colleague, Greg Baer, ​​co-wrote a book in 2002 called The Great Mutual Fund Trap. In it, they criticized professional stock voters for charging high fees and delivering poor returns, and urging savers to buy index funds rather than actively managed investments.

Don’t be fooled into thinking that your interests are the same as your brokerage interests, Messrs Gensler and Baer wrote. In the vast majority of cases, expert money management advice simply leads investors to underperform the market and enrich Wall Street.

As SEC chief, Mr. Gensler now also looks at similar fees charged by private equity firms. While the SEC has traditionally viewed large institutions such as pension funds as more sophisticated than individual investors, Mr. Gensler said these private equity investors could benefit from more disclosures.

If private equity had lower fees, pension funds would get more, Mr. Gensler said. Now the private equity general partners might get a little less.

Write to Paul Kiernan at [email protected] and Dave Michaels at [email protected]