President Joe Biden’s nominees to lead the Securities and Exchange Commission and the Consumer Financial Protection Bureau took tough questions from the Senate Banking Committee during their confirmation hearing Tuesday.
Gary Gensler, nominated to head the the SEC and Rohit Chopra, picked to lead the CFPB were asked to wade into some of the most controversial topics in finance today, including the ideal regulatory response to the meme-stock phenomenon, the debate over student-loan forgiveness, and how financial regulators should address pressing issues including climate change and economic and racial inequality.
The Ranking Republican on the committee, Sen. Pat Toomey of Pennsylvania, pressed Gensler on progressive proposals for the SEC to require companies to disclose information related to climate change. He asked Gensler if he thinks that the SEC could require a company whose energy bills are not financially significant to report how much energy they derive from renewable sources.
Gensler said that disclosure requirements will be based on the concept of materiality, and that while a single piece of information may not be material in itself, materiality must be viewed in the context of the “total mix of information” that a reasonable investor might think material to their investment decisions, leaving open the door that Gensler could pursue requiring climate disclosures if confirmed.
Later in the hearing, when asked by Democratic Sen. Elizabeth whether there is any reason why companies should be able to hide their climate risks from investors, Gensler replied, “No, they should not.”
Pressed on whether the SEC should require companies to disclose information on workforce diversity, Gensler appeared eager to look at ways to force companies to disclose information on workforces more generally. “I think human capital is a very important part of the value proposition in so many companies,” Gensler said.
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Chopra took several questions on the CFPB’s qualified mortgage rule, which requires lenders, before making a residential mortgage loan to a consumer, to make a reasonable good faith determination of the consumer’s ability to repay the loan.
“The CFPB is not here to dictate housing finance policy, it’s to make sure the prohibitions when it comes to our mortgage laws are adhered to, and when it comes to QM it is important that we balance the consumer protections that Congress has put into place with access,” to mortgage loans, Chopra said. “We don’t want to go back to what we saw in the years leading up to the financial crisis”.
Senators were also concerned about student loan indebtedness in America, as several Democrats reiterated their belief that the federal government should forgive some portion of $1.5 trillion owed to the Department of Education in student loan debt.
Democratic Sen. Tina Smith of Minnesota raised the issue of borrowers who have relied on the public service loan forgiveness program to make their career choices f inding out, for one reason or another, that they will be unable to have their loans forgiven after 10 years of public service.
Chopra agreed that this is a pressing issue that the CFPB has a role in addressing. “Many members of the military and teachers depended on a public services loan forgiveness program when making career decisions,” he said. “We are at a critical moment when so many borrowers are going to have to restart payment [when a COVID emergency forbearance period is set to end]. It needs to be done lawfully and the CFPB has a big role to play.”
One of the more tense exchanges of the proceedings came when Sen. Toomey brought up remarks Chopra made in 2016 when he said that Congress members who support policies that would make the CFPB subject to the appropriations process or turn the CFPB into a body governed by a bipartisan board “must be seen as shilling for predatory lenders. There’s no real argument for it other than representing those who are essentially breaking the law.”
Toomey said he took exception to these remarks as impugning his motives, saying that he supports those policies in order to promote greater accountability. Chopra replied that he regrets the comments, and admitted that there could be principled motivations for these policy positions.
Other policies that Gensler committed to considering include potential SEC regulation on forced arbitration clauses that most retail traders are required to agree to in order to get a brokerage account. “While arbitration has its place, customers should have an avenue to redress their claims in court,” he said.
Democratic Sen. Mark Warner of Virginia suggested that the SEC address the controversy surrounding the practice of payment for order flow, whereby stock brokers are paid by market makers to direct customer trades to them. Critics say the practice creates a conflict of interest because brokers are incentivized to encourage their customers to buy products that will lead to higher payments for order flow. For instance, market makers will pay much higher rates for risky options trades than they do simple equity trades. Gensler committed to engaging in a full review of payment for order flow.
Payment for order flow was brought to the public’s attention by the GameStop Inc. /zigman2/quotes/203755179/composite GME -6.99% stock market saga in late January, and the topic was raised repeatedly by senators. Gensler said that the episode raises three important questions that he will have to address as SEC Chair: How to ensure customers still get best execution in the face of payment for order flow; how to protect investors using trading apps that have features that encourage frequent trading; and how to ensure customers have access to markets when their brokers are restricting trades to avoid running afoul of margin requirements.
Overall, neither nominee made any major gaffes that would potentially risk their not getting confirmed, given Democratic control of the Senate. Edwin Groshans, analyst with Height Capital Markets predicted that both Gensler and Chopra will be confirmed by “mid-to-late March.”