CONFIRMATION HEARING: Chopra and Gensler

CONFIRMATION HEARING: Rohit Chopra, Director of Consumer Finance Protection Bureau (CFPB), and Gary Gensler, Member of the Securities and Exchange Commission (SEC)

March 2, 2021

Senate Committee on Banking, Housing, and Urban Affairs

On Tuesday, March 2, the Senate Committee on Banking, Housing, and Urban Affairs held a full committee hearing on President Biden’s nominations of Gary Gensler to join the SEC and Rohit Chopra to direct the CFPB. Topics covered in the hearing included concerns around the volatility of GameStop’s stock and the impact of emerging technologies, disclosure requirements, student debt, diversity, enforcement actions, and foreclosures. 

ISSUES RAISED

  • Disclosure Requirements – Multiple Senators raised questions about what topics would be considered material for disclosure requirements to investors. Gensler stated that materiality is defined by the Supreme Court, and his interpretation is that it has to be significant to the mix of information that a reasonable investor would want to make decisions about whether to invest or how to vote. He committed to being grounded in the economic definition of materiality, not a political definition. In response to a question from Sen. Bob Menendez (D-NJ), Gensler stated that given strong investor interest in what companies are doing in the political arena, the SEC should consider action on mandating political disclosures. In response to Sen. Chris Van Hollen (D-MD), Gensler stated that SEC has a role to play in bringing consistency and comparability to environmental disclosures given the significant investor interest.
  • Enforcement Actions by CFPB – Multiple Senators raised concerns with CFPB’s enforcement authorities, with Republican Senators, including Ranking Member Pat Toomey (R-PA), raising concerns with the lack of accountability at CFPB, and several Democratic Senators, including Sen. Catherine Cortez Masto (D-NV), raising concerns about the lack of enforcement actions under the previous administration. Chopra stated that an independent agency was better able to stay clear of political influence, and committed to improving transparency, efficiency, and effectiveness of CFPB supervision and enforcement programs. He stated his goal for CFPB is to fix harms and make it clear to market participants what is expected of them. Chopra agreed with Sen. Mike Rounds (R-SD) that it would be inappropriate if funds from CFPB civil penalties were not used for the statutory reasons, primarily victim redress.
  • Enforcement Actions by SEC – Multiple Senators raised concerns that the SEC’s enforcement actions could curtail business innovation, with Sen. Cynthia Lummis (R-WY) raising concerns that environmental disclosures could impact the ability for Wyoming energy companies to raise capital. Gensler stated that climate risk disclosure regimes can be pro-issuer, pro-corporation, and pro-investor by providing information investors are looking for and creating consistency and comparability. In response to a question from Sen. Steve Daines (R-MT) on the balance between enforcement actions and issuing guidance, Gensler stated that his philosophy is that with enforcement, SEC follows the facts and the law, using limited resources to change market behavior where there are the greatest problems in the market. He stated that if a sector is ripe with fraud, sometimes targeting a few actors can cause the rest to clean up their behavior.
  • GameStop, Robinhood, and Consumer Protection – Multiple Senators raised concerns around the volatility of the GameStop stock, the actions of the Robinhood consumer stock trading platform, and emerging technologies in the financial services industry. Chopra noted that there are new forms of data collection and behavioral advertising to incentivize trading, and that CFPB needs to offer a robust way to ensure compliance with the Equal Credit Opportunity Act and to hold them accountable when they are not. Chopra stated that we need to understand more clearly how massive data collection is impacting our privacy, the security of the data, and decisions made by algorithms. He stated these raise real questions of transparency. He highlighted that algorithms can have flawed decision making that no individual can explain that can still result in discrimination, noting a recent HUD complaint against Facebook. In response to a question from Sen. Elizabeth Warren (D-MA) on the topic, Gensler stated that while arbitration has its place, it is important that investors and customers have an avenue to address their claims in court. In response to Sen. Mark Warner (D-VA), Gensler stated that the SEC will look at market structure and equity markets around payment for order flow, noting that just a handful of firms purchase the majority of retail flow in America.
  • Cryptocurrencies and Digital Assets – Multiple Senators raised concerns about cryptocurrencies and digital assets. Gensler stated that cryptocurrencies like Bitcoin have brought new thinking to payments and financial inclusion, but they’ve raised new issues of investor protection. He stated that if confirmed, he would work with his fellow commissioners to promote innovations and ensure investor protection. He noted that for digital assets like Bitcoin, which are classified as a commodity, the Commodity Futures Trading Commission (CFTC) would have jurisdiction, but that when an investment contract or security is under SEC’s authority, it would act to protect investors. Gensler stated that one area of consumer protection that requires work is around custody of funds in digital assets, as the ownership relies on a private key, and efforts need to be made to ensure that is really custody. He also stated that investor protections can take the form of removing fraud and manipulation from the markets.
  • Student Debt – Multiple Senators raised concerns with the increasing amount of student debt held by individuals, and asked Chopra what the CFPB can do in this space to protect borrowers. Chopra stated that Congress has made it clear there are concerns around financial products being offered to college students. He stated CFPB should help educate them and said he would work with Education and Treasury on issues of common concern like this. He recognized that many students are graduating and facing an especially challenging job market right now, and stated there was an obligation to ensure they are protected and do not default simply due to the job market. Chopra stated that for many people of color, they are more likely to need to borrow to go to college, and in many cases, after college, they continue to face a wage gap. He noted that data shows that African American women with college degrees often do not see an increase in their wages, meaning that debt is even harder to service. He stated he wants to engage with states and with the Department of Education to ensure borrowers are not set more behind.
  • Competition for Proxy Advisory and Credit Rating Firms – Sen. John Kennedy (R-LA) asked if it was a fair assessment that credit bureaus are less concerned with the accuracy of information about an individual’s debts because the individual is not a customer, but rather the product being sold, and if this was the case, should Congress pass a bill directing credit bureaus to establish an efficient appeals process for consumers. Chopra stated that was correct, that in this case the individual would be the product, not the customer. He stated that accuracy is critical for the credit reporting system to work, and there are too many consumers who have problems, so it could be challenging to create an effective and efficient system. He stated he supports the idea of ensuring consumers can dispute and get answers, and stated he would work to make sure consumers have more say. Sen. Tim Scott (R-SC) asked Gensler if he would commit to opposing federal government action to further entrench the incumbent NRSROs. Gensler stated that competition is really important in the credit rating space and in the broader capital markets, and committed to working with the Senator if confirmed to better support and promote competition in the credit rating space. Sen. Daines raised concerns that there is a de facto duopoly in the proxy advisory industry. Gensler stated that in all parts of the capital market, from proxy advisors to credit rating agencies, competition is good, bringing transparency, lower costs, and more efficiency. He stated that it is the role of the SEC to root out these conflicts of interest through disclosure requirements and other rules. He highlighted that proxy advisory firms can be really beneficial, especially for pensions funds.
  • Foreclosures and Housing – Multiple Senators raised concerns with the upcoming housing cliff and the potential for a wave of foreclosures due to the economic impacts of the COVID-19 pandemic. Chopra stated that a wave of foreclosures is devastating to individuals, their families and their future, thus impacting our economy and our entire financial system. He stated the CFPB has been entrusted to monitor mortgage markets, working with regulators and with states to spot risks. He stated his priority is ensuring people can stay in their homes and not be deceived about what their options are. Chopra noted that the Office of Servicemember Affairs will have a role to play on this issue, as servicemembers, veterans, and their families can be seriously impacted by unlawful foreclosures, with some servicemembers having to fly home from overseas deployments to deal with unlawful foreclosures. Sen. Jon Tester (D-MT) asked Chopra to elaborate on the most important considerations as the CFPB looks to revise Qualified Mortgage (QM) rules. Chopra stated that CFPB is not here to dictate housing finance policy, it’s to make sure that the prohibitions around mortgage laws are adhered to. Chopra stated that safe and broadly accessible mortgage lending makes us stronger economically and as a country, and committed to working with stakeholders and Congress to determine how that rule needs to evolve over time. 
  • Diversity – Multiple Senators raised concerns with diversity on boards and within companies, and asked Gensler to elaborate on the role of SEC in this space. Gensler stated that diversity in boards and diversity in senior leadership benefits decision making and it is something he is committed to at the SEC. He stated that given increasing interest by investors and the role human capital plays broadly in the value proposition in many companies, the SEC should look at what information investors want disclosed about human capital, including around diversity. 
  • Financial Transaction Tax – Sen. Thom Tillis (R-NC) noted the negative impact in Sweden of a financial transaction tax and noted the EU abandoned plans for a similar tax because of the possible negative impacts, and asked Gensler if pursuing financial transaction taxes was a good idea, or if it could have the same negative impacts seen in other regions. Gensler stated that while this wasn’t an issue he had much familiarity with, he noted that the U.S. has a modest transaction fee, which helps support the SEC, and with that modest fee there have not been negative outcomes. He stated he would work with the Senator on this issue to better understand the impacts of proposed financial transaction fees or taxes.