55 mins

The Problem Podcast

SEC Chair Gary Gensler Answers Your Questions

SEC Chair Gary Gensler is back! Jon throws him some of the thousands of audience questions we got, and they dive into the issue of whether the SEC is doing enough to ensure market transparency, why there’s not more accountability for the market’s biggest players, and what the limits on SEC power mean in a practical sense. Plus, we set a record for most acronyms in a single episode–PFOF, DRS, PSA, UBS! You name it, we got it. 


SEC Chair Gary Gensler Answers Your Questions

EP 211 Final Transcript

Jon: All right everybody, welcome once again the podcast. The Problem, with me, Jon Stewart. The TV show is back on Apple TV+. Season two, last week’s episode, I guess gender it’s on there for free, for God’s sakes. What a gracious and lovely group of people we are. Today we’re excited. We’re checking in with one of our season one guests. Securities and exchange, commission chair, Gary Gensler. He was on, uh, when we were discussing the stock market, and that was season one. 

And by the way, we did put out an inquiry to our online community and they sent back just thousands of uh, really interesting, really well thought out questions. And I will do my best to bring the gist of those questions to uh the head of the Securities Exchange Commission. I won’t do justice, I’m sure to how thoughtful and specific they are, but I will do my best to, to bring those larger points to him.


Interview with Gary Gensler Begins

Jon: Sir. Commissioner, welcome back.

Gary: It’s good to be with you, Jon. 

Jon: Are you, do you go by commissioner?

Gary: Most people call me Gary, but if you want to use an honorific, it’s usually chair. 

Jon: Well, thank you. I’m gonna go with the commish. I’ll go with chair. All right chair is good. Gary, last time we talked, you had discussed, you know, how important it was to bring fairness and transparency. We talked a lot about retail. So we can talk about that in a little bit. Can you give us an update, from the SEC’s perspective on where we stand now? So whatcha got?

Gary: So I, I thank you, Jon for inviting me back. The course of, it’s been about a year since we were together. 

Jon: Mm-hmm.

Gary: Uh, our agency put out an agenda. It had 50 or 55 items on it. Our total capital markets. Most people think of the stock market, but our total capital markets are about a hundred trillion dollars in size.

Jon: Mm-hmm. 

Gary: Our stock markets about 40 or 45% of that. But across that whole capital markets, we put out this agenda and we have made proposals in about two thirds of the areas. And critically for some of your listeners in terms of the stock market, we put out proposals with regard to more transparency about short selling, more transparency about where one borrows stock, and that’s called securities borrowing. We put out proposals about insiders of big companies selling their stock. 

Jon: Mm-hmm. 

Gary: But what we have not yet put out, and we’re getting close to, is putting out some proposals about, uh, the core of this stock market, which I’m gathering you’ll probably ask me more about, so I won’t get ahead. 

Jon: Right.

Gary: But again, I feel really good. We’ve got a great team in place. 

Jon: Mm-hmm. 

Gary: Uh, there are challenges. Absolutely. I wish we were a bigger agency. I wish we hadn’t shrunk during the prior administration. We’ve had a robust enforcement agenda as well. And I think, uh, we can get into that when we’re talking a little bit more.

Jon: Right, you’ve put out some proposals. Uh, give us a little sense of what’s the difference between proposals and rule making, you know, it’s not a level playing field, in the market so—

Gary: It’s not a level playing field. 

Jon: Yeah.

Gary: Let me step back a little bit. 

Jon: Sure. 

Gary: So, Congress writes the laws. 

Jon: What? Wait a minute. And how does a bill become a law?

Gary: We, the Securities and Exchange Commission, we were set up about nine decades ago in the 1930s. And we do, our rule making based upon what authorities Congress has given us and then through something called the Administrative Procedures Act. No, don’t, don’t nod off. I know you probably never studied this in high school civics. But, it’s really an important thing that the only way we can do rule writing is we put together a proposal within our authority from Congress. We have to do a bunch of economic analysis around efficiency and competition and capital formation. Put that all together, put it out to public comment. 

Jon: Mm-hmm. 

Gary: And then hear back from the public before we can actually then go forward to finalize a rule. And as I said,in terms of those listening. It’s really helpful to hear from you and especially—

Jon:I got questions, man. We put it out on on on—

Gary: Good. Good. 

Jon: – Reddit, YouTube and Twitter. We got questions baby! 

Gary: When we put proposals out to hear from the public, and particularly as we’re getting closer to putting proposals out about—

Jon: So are these proposals that the public face?

Gary: -trying level the playing field to hear from the public. 

Jon: Right.  

Gary: And, or what we’ve already put out on short selling and stock borrowing and insiders trading in their own stock, uh, you know, senior executives to hear from the public. And then we take all that in to try to finalize a rule.

Jon: Right. In your mind, is the idea that you go through the proposal phrase, Then there’s the public phase,  and then it goes to possible rule making. And the idea is all that takes long enough that a new administration comes in and then they don’t have to deal with it anymore. Is that the general—

Gary: Well, the real idea is to promote our three part mission.

Jon: Capital formation, investor confidence. What else you got? What’s the third pillar? 

Gary: Well, I actually, I think of it as protecting investors first. That’s what congress put in place first. Protecting investors. Yes, you’re right about facilitating capital formation. That’s people raising money, and that can even be you who takes out an auto loan or takes out a mortgage. You’re raising money in that regard. But then it’s that which is in the middle. That which is in the middle is we have part of our mission to promote fair, orderly, and efficient markets. Well, if we promote something in the middle to be lower cost, that’s better for investors. And it’s actually better for issuers. It’s usually the middle though, says, “Wait a minute, I’m, I’m earning less.” 

Jon: Mm-hmm. 

Gary: But most of what we’re trying to do, and, and I’m a market guy, and yes, Jon, I worked on Wall Street for 18 years early in my career, is trying to ensure that the middle is more efficient. That means lower cost if you are an investor. You wanna invest in the stock market. If you have lower cost in the middle uh that’s good for you.

Jon: So you’re talking about a balance between, let’s say, the cost of entering the stock market versus, what the best execution would be. The liquidity, you know, all the grease that keeps the stock market moving.

Gary: The middle of the market is almost like the neck of an hourglass. Just visualize this for a minute. 

Jon: Hold on.

Gary: Think of an hourglass and all the—

Jon: Are you saying the stock market zaftig? Is that what what I’m hearing?

Gary: No, no. I’m saying that if you think about the financial market 

Jon: Mm-hmm. 

Gary: It’s like billions or even trillions of grains of sand flow through every single day. Every day trillions of dollars of transactions. 

Jon: Mm-hmm.

Gary: And Wall Street and Finance and the city of London and so forth sit at the neck of the hourglass. If an agency like ours can make that neck of the hourglass more transparent, more competitive, less costly, that’s good for the people on each end of the hour glass. 

Jon: All right, so let’s get to that. 

Gary: We need that sand. The sand is money and risk.

Jon: What you’ve done so far is create a beautiful, that’s a beautiful metaphor. And I think many people right now are imagining the, the hour glass in, in their minds. But let’s, let’s get to that thing so—

Gary: And our job is to try to lower the cost in the middle. 

Jon: Yes. 

Gary: One of our jobs and make it fair—

Jon: Overwhelmingly.  

Gary: -to the folks at each end of the market. 

Jon: Overwhelmingly, the questions that we got related to transparency, sort of these backroom financial instruments, lit market versus not lit market. So naked shorting was one of the biggest, uh, in terms of the, the commentary that we got and this will go along with the framing of most of the questions. All right, so here’s one. 

Jon: What’s the difference between counterfeiting money and market maker exempted naked shorts coupled with FTDs? The point of it being, if you don’t have the transparency and you can just, be overselling the shorts and people don’t understand or can’t see, let’s say you’ve got five banks doing you know, 50% of the, the market shorts, and they don’t even hold, uh, those shares in and of themselves. How do you bring transparency to that and what’s the difference between that and just having a printing press of money?

Gary: So, uh, let me say, I agree with your, uh, listeners and folks that wrote in. We need more transparency and better transparency about a really core part of the market is when somebody sells securities they don’t own, that’s called shorting. You might say, “Well, how do they do that?” We have to borrow somebody’s securities, uh, to sell it. What’s called short. 

Jon: That’s right.

Gary: And— 

Jon: You don’t have that stock you’re betting on it.

Gary: Uh, by the way, Congress agrees with this. Congress 12 years ago, said we should have more transparency in this arena as well. I came on board last year and we still had not done one of the rules that Congress mandated that we do after the financial crisis. 

Jon: Right.

Gary: Uh, there were eight rules we hadn’t yet done. I don’t know why, Jon, but we’re getting those done. And one of them is greater transparency in this short selling, but also greater transparency when you have to bar the securities. We put those out. 

Jon: Correct. 

Gary: Late last year. 

Jon: So what’s, what’s the rule now for transparency that’s going to be implemented?

Gary: So, Well, I can’t prejudge it cuz we didn’t finalize it. But what we basically are saying is that on the, the borrowing, borrowing those securities, that that market would be much more transparent and you would, you would get on a regular basis. We actually propose something that would be happening throughout the day. 

Jon: Right. 

Gary: Um, a lot of commenters said –  

Jon: Okay. 

Gary: – that’s too too, too uh—

Jon: Cuz now there’s now what? About a two week lag? 

Gary: There’s a two week lag right now on short selling. 

Jon: Mm-hmm. 

Gary: There’s actually not public disclosure yet on the stock borrowing. So we wanted to address both sides of it. 

Jon: No public disclosure. 

Gary: There are some private data feeds where you can pay for it, but we—

Jon: There you go. That sounds fair and transparent. 

Gary: We are proposing a rule or did propose a rule where that transparency would happen, uh, on a regular basis throughout the day. On that stock borrowing. 

Jon: Mm-hmm.

Gary: And then on the short selling, additional, disclosure there as well.

Jon: So these proposals, uh, to bring that in there, you know, that’s obviously, uh, a much slower process. Can’t you use enforcement to, uh, bring consequences to companies that have already, like for instance, uh, let’s say UBS, right? So UBS, uh, I guess was selling stock they didn’t have and not delivering the stock. And I guess the two day, I guess there’s a two day period where you have to deliver the stock within there, and you guys have proposed to take it down to one day, but so, for nine years they’ve been doing that. They were caught. You know, and obviously it’s a step in the right direction, but, uh, they were fined, I think 3 million dollars? Was that it? For, for that nine year, uh, period?

Gary: So I don’t have the exact figure in front of me, but let me step away from one case. 

Jon: It’s $3 million dollars. I have it in front of me. It’s 3 million dollars.

Gary: Well, I, I, I, I trust you.

Jon: Nine. Nine years, $3 million dollars.

Gary: So, we’re a cop on the beat. 

Jon: Yeah.

Gary: Uh, our agency is about 4,500 people strong, 

Jon: Mm-hmm.

Gary: About half were in examinations or enforcement, but even the folks that’s about 2,400 of the folks in examining, financial actors to ensure that they’re complying with the roles and then an enforcement division, uh, that brings seven plus hundred cases a year.

Jon: Mm-hmm. 

Gary: Uh, during the year, and the short selling rules on the books are really important, but I don’t think they go far enough. I’m saying we have proposed things to go further. 

Jon: No, I know. 

Gary: But in terms, in terms of our current enforcement authorities, uh, if somebody is not complying with the law or the rules that our predecessors put in place—

Jon: Mm-hmm.

Gary: -then we are a cop on the beat, but I’d also say to your listeners, bring that in. You asked me the last time we were together about crowdsourcing. 

Jon: Sure.

Gary: I know you didn’t really, you didn’t probably, embrace with a warm hug my answer, but I think it really is important that, uh, you call it crowdsourcing and I call it tips, complaints, and referrals.

Jon: Mm-hmm. 

Gary: I call it, whistle blowers. Uh, bringing things into us. We get about 45,000 tips, complaints, or referral per year. 

Jon:  Right. Let’s say I bring you a tip that UBS for nine years hasn’t been delivering, uh, uh, the stocks and the only penalty they face, you can imagine UBS probably made billions of dollars, you know, of this type of practice. And if the penalty is only $3 million, that’s not even a slap on the wrist. I mean, if I knew that crime paid that well, I would, you know. Well, I mean, I’m a comedian, so I guess crime does pay well. That is, it’s basically stealing…

Gary: I don’t, uh, I’m not gonna dive into those specifics of that case. 

Jon: Mm-hmm. 

Gary: But in general, what we’re allowed to do as an agency is seek what’s called disgorgement. So if a firm— 

Jon: Mm-hmm. 

Gary: Any firm or any individual, uh, has to disgorge their profits. So if you made a hundred million dollars,  after expenses, you know, you’ve got a net of a hundred million—

Jon: Mm-hmm.

Gary: -then we can go after that to what’s called disgorgement. You give it up and then in addition, penalties. Now it is the case that often we, uh, have disputes with, uh, defendants about what their profits were.

Jon: Mm-hmm. 

Gary: And are, and our economists go in and try to chase that down and really get the facts and build a case. And often it can take two and three years to build that case. Again, it’s why I think we’re under-resourced. With in – 

Jon: But I’m addressing at the larger point.

Gary: -those 1300 people, that’s what we do. We do, We look at. And so, uh, again, you’re hypothetical. If somebody was making a billion dollars in you’re hypothetical. Then we would say, “You’ve gotta disgorge that.” And we’ve had cases in this past year where we have held people accountable. Companies as big as the Allianz Insurance Company, uh, uh, is an example. Uh, significant in fact, this, this past fiscal year, uh, we in the federal government have a year that ends September 30th. Don’t ask me, I don’t know why, but you know, it’s a fiscal year ending September 30th, and our, uh, disgorgements and penalties added up to in excess of 6 billion dollars, which was up uh, the, the prior year is about four and a half billion. So the last 12 months, we have seen that go up in some really important cases, whether it’s, uh, holding a bunch of large banks accountable for using off channel communications, using WhatsApp in their books and records area. 

Jon: Right. 

Gary: Having a folks, um, as I say, in the sort of complex products area, like in Allianz, in a big way, or whether it was companies. Companies who were issuers that misled their public in their filings. Boeing, I mean, it was tragic as to what happened with the airplane, the faulty, uh, uh, technology. But, uh, that they misled the public. “Oh, everything’s alright.” 

Jon: Do you have confidence that, congress, has any interest in this given their own history with insider trading to a large extent. I mean, uh, if you are a sitting representative or senator and you are in committee meetings discussing what’s gonna happen with COVID, and then you walk outta that meeting and you unload. Uh, you know, any of your stocks that may have to do with the pandemic or you buy up things that you know is happening, You know, uh, 75 federal lawmakers, I think, uh, bought and sold in the early weeks of the pandemics. You know, when you’re bringing this idea of fairness to the markets and people are seeing no accountability for lawmakers, some accountability in terms of fines and disgorgements for the bigger players. But I think they’re not seeing movement on those that they think control the markets and are the bigger players in the markets. And so how do you prioritize that? And also shouldn’t congress, I mean, how the hell are they allowed to hold stocks and trade in equities?

Gary: So let me say something unambiguous here.

Jon: I mean, you have the authority to clarify those laws. Yes?

Gary: Yeah. So let me say something unambiguous. Insider trading laws. 

Jon: Mm-hmm. 

Gary: Meaning trading or material non-public information.

Jon: Correct. 

Gary: That applies to everybody. Whether you are working at a company, whether you’re not working, whether you’re in government, whether you’re in Congress. And we, the Securities and Exchange Commission, uh, have been and will be and will continue to be a cop on the beat on that. On trading, on material nonpublic information – 

Jon: Right. 

Gary: – which is not allowed under the law. That’s called insider trading. 

Jon: But if you look at it— 

Gary: So that’s that’s—

Jon: You know there’s a whole- there’s a whole feed on Paul Pelosi’s stock trades. They say if you follow his stock trades, you’ll kill the market. You know, Kelly Loffler, I don’t know, she unloaded millions in stocks after a briefing on, COVID-19, and then downplayed the severity of the virus and nothing happened to her. You know, nothing happens to Congress people where it’s, it’s very clear that they’re profiting from the knowledge that they have inside the government.

Gary: Well, again, um, I can’t, I can’t speak to any, one matter.

Jon: Mm-hmm. 

Gary: The SEC is a law enforcement agency.

Jon: Right.

Gary: It’s called civil law enforcement. 

Jon: Right. 

Gary: Rather than criminal law. That’s what the Department of Justice does. Though we team up. We team up quite often with the Department of Justice. 

Jon: Right. 

Gary: Um, but it’s really to instill greater trust in the SEC that we don’t talk about individual cases that may be under investigation or may not be under investigation, uh, until they’re actually finalized. And if we actually bring the action and that, that’s really to be fair to the whole market and the market participants. But on your core issue. On your core issue. 

Jon: Right. 

Gary: If somebody is trading on material, non-public information, information, uh, you know, that, that comes from those, uh, companies or occasionally comes from inside the government.

Jon: Right?

Gary: And, uh, that’s against the law. And we will chase that. Um, but we have held members of Congress accountable. We have brought cases. If the facts and the law take us there in the future, uh, we will unfortunately do it again.

Jon: Right. 

Gary: But it’s how you instill trust. It’s how you have trust in the capital markets. It’s the same reason why we have this proposal outstanding about insiders at companies. 

Jon: Do you think that the penalties for, uh, the types of shenanigans that we’re talking about, whether it be naked short selling, uh, or insider information being used by people in power to gain profit or any of those things, do you think that the consequences that they faced and the speed at which they faced them, does bring confidence to people in the markets?

Gary: I look, I, I understand the public’s frustration here and I, I share that frustration, Jon. We have certain tools as an agency. Penalties are one of them. Disgorgement, I distinguished disgorgement is giving back the ill gotten gain, penalty is what you add on top of it. But I think it’s also about individual accountability, holding individuals accountable, not just their firm. I mean, you can bring a case against a big multi-billion dollar bank and sometimes they’ll say, “Let’s just settle for the penalty,” even a hundred million dollar penalty and move on. And so actually having individuals accountable. And I would also say two other things. We put out these orders, they’re called, uh, um, but the orders tell the narrative, tell the background and the facts. And I did this in the Obama administration when I was honored to chair another federal agency. The Commodity Futures Trading Commission. Often even the telling of those facts are really important so that the public understands what is happening. And then lastly, sometimes also what’s called undertakings, that they commit for X number of years to change certain key behavior. And then sometimes working with the Department of Justice and the criminal authorities to send people to jail. 

Jon: Give me an example of that happening to your satisfaction. Cuz like I’ll look at, you know, these situations and yeah, you’re right. It’s frustrating to look at these actors that continue to, uh, look for loopholes and they certainly have the finances. I mean, a lot of their lawyers are former SEC employees, but, so let, let’s say for instance Arkāgos. I mean that was a small company that over leveraged right? And nearly blew up the major media company. Yes?

Gary: So let me, let me uh, say two things. One is lawyers, accountants, investment bankers that are listening to this podcast at —

Jon: Mm-hmm.

Gary: -6:00 AM or whenever you put it out. 

Jon: Right. 

Gary: These gatekeepers have a role and a responsibility under the law. 

Jon: Mm-hmm.

Gary: And I would say this, if your client is asking you something right up against the line and you’re sort of saying, you know, you can structure it this way or that way, my advice to you is tell ’em no step back from the line. Don’t try to, uh, find a loophole or what’s called arbitrage. Um, I think of a duck test. I’m just sorry to speak of it this way, but if it waddles like a duck and it quacks like a duck, it’s probably a duck.

Jon: But don’t you think, they know that it’s a duck at this point? I think it’s troubling to hear the SEC chairman say, “Our goal is to have Wall Street people appeal to their better angels.” That’s—

Gary: No. No, because they’re what I’m saying, Jon is gatekeepers have a role as well and we’ve held gatekeepers, including big accounting firms, Ernst & Young, and, Deloitte this year, uh, I mean, my God, one of ’em was actually cheating on their own internal ethics exams. And so, uh, yes, it’s true. 

Jon: But that’s, I mean that’s the story of this.

Gary: So I’m saying that gatekeepers have a role.

Jon: I know, but without accountability they’re not gonna play that role.

Gary: So this is just a bit of a message to the gatekeepers through your podcast. Uh, it’s all I’m saying on Arkāgos— 

Jon: Are you saying you’re coming for ’em? 

Gary: We already have. And we will continue to. They have responsibilities. You asked about a case called Arkāgos. I can’t speak about that because we brought charges, but it’s in litigation right now. 

Jon: Mm-hmm. 

Gary: A family office, uh, that grew quite large through a use of a, a complex product called securities based swaps, or sometimes called total return swaps.

Jon: Right. 

Gary: Were—

Jon: That are not transparent as to the size of them. Correct?

Gary: They are not transparent as to the size. And that’s again, why we made one of these proposals. One of those 36 proposals is in this area around transparency of large trader positions in securities based swaps. 

Jon: Mm-hmm. 

Gary: Uh, you can imagine there has been some pushback, um, as there’s been pushback on others of our proposals.

Jon: Right. 

Gary: I think that, that, that it’s in the, in the right direction.

Jon: What is the push back against that? Why would, why would anyone suggest that, uh, someone should be able to take large positions in that without revealing them?

Gary: Some of the commenters say we put the thresholds too low and should they be a bit higher. And, uh, some of the pushback is that we said it had to be reported the very next day and whether it should be a, uh, a handful of days, uh, uh, later or even at the end of the month. 

Jon: A handful of days though is — But that’s such a glacial pace.

Gary: Arkāgos we also brought charges with the criminal authorities about the, uh, the leadership there.

Jon: Yes. 

Gary: That they had been defrauding and misleading their counterparties, the big banks. Now I know, I know your listeners might think, ah, that’s a, but it was between this family office that was measured in the tens of billions of dollars. 

Jon: Mm-hmm. 

Gary: That was misleading their counterparties, the big banks through these total return swaps. And we have alleged also manipulating the market.

Jon: At this point, do you believe that the litigation will be successful against the rules, Uh, or that these people will go to jail or that some accountability will be brought to this, uh, in a timely fashion?

Gary: I’m a chair of a five member commission. I voted on that action. I definitely believe in that action. I can’t speak about further about the ongoing litigation, but if I can go more broadly, more broadly, I do believe that our mission about protecting those investors first, yes, capital formation and the fairness and orderliness of that middle, the efficiency of the middle, the markets— 

Jon: Mm-hmm.

Gary: -that this has been part of our economic success over the last 90 years. It is not perfect. Is the SEC underfunded? Yes. Could we deal with more people— 

Jon: Doesn’t it play a role in accountability? 

Gary: Are these markets, are these markets nuanced and, uh, textured? And are there teams of lawyers outside. For every lawyer we have – 

Jon: Mm-hmm. 

Gary: – There’s multiple lawyers outside that are thinking, All right, maybe I can advise my client to do it this way or that way. And that’s why I also focus on the gatekeepers. 

Jon: I’m gonna go back to our folks that we got the questions from. Uh, let’s talk a little bit about, here’s one that, that I think people were really curious about, and this was another one of the large kind of tranche of questions that we got. Uh, I’m not even gonna tell you what the name of the person is, who’s account this is because it’s filthy. But Jackie Le Hm. Said, uh, “For the love of God, ask about game stop, dark pools, failure to delivers and swaps.” And then, uh, Pat Arocon Reddit. This is concerning dark pools. “How can anyone know the value of anything if shares are never actually bought and sold on the market, just endless IOUs that don’t affect the price.” And I thought that was a really, uh, critical question that gets to kind of the heart of everything that happens off the exchanges. I mean, this is a, a relatively new phenomenon within the stock market, but, uh, there’s the lit exchange and there’s the non lit exchange and there’s so much that goes on that people can’t see. 

Gary: Look, too, 

Jon: There’s so many IOUs—

Gary: I, I’m sorry that it, was it Jackie and, um, I can’t remember the other —

Jon:  Pat. I think Pat. 

Gary: Pat. To Jackie and Pat. Uh, I think you’re right that, that right now, uh, transactions happen on what’s called the lit market. 

Jon: Mm-hmm. 

Gary: And then the dark market, if you wish, are dark pools. And that’s two areas. There’s these alternative trading systems, but then also, uh, brokers that we call wholesalers or internalizes and the like. And Jon did a piece on this last year that you can go watch and has great charts on it. And – 

Jon: Great graphics department. 

Gary: Good. Really good graphics department. 

Jon: That’s right.

Gary: Um, and so I’ve asked staff, uh, and I gave a speech earlier this year and this speech earlier this year, this at, at this Piper conference, Piper Sandler, I think it was.

Jon: Mm-hmm.  

Gary: Um, I gave this speech really to say, “Look, I, everybody should be put on notice that the staff is gonna be forming recommendations up to our commission around these items.”

Jon: Mm-hmm. 

Gary: And, and it’s about how do we level the playing field across the markets? How do we make sure that off market in the dark pools, that you have some of the same rules with regard to minimum price increment. It might sound wonky and technical, but – 

Jon: You’re talking about best execution and things like that within the dark pools and the lit markets.

Gary: Well, yes. Well, I even asked the question when I got to the SEC last year, I said, “Can I see our best execution role?” And they said, “Well, it’s actually not ours. It’s a self-regulatory organization called FINRA.” 

Gary: And I said, “Wait, wait.”

Jon: Ooh don’t let me get started on FINRA.

Gary: “Let me just understand. We, the Securities and Exchange Commission often talk about best execution and we actually don’t have one on the books.” It’s the self-regulatory organization, the industry group called the FINRA. So I’ve asked staff, I would, I would like to put out a proposal, an SEC best execution role. An SEC update on our disclosure rules about price improvement. Cuz they’re always saying, and marketing and bragging that they have price improvement. How about having a little bit better disclosure on that? Uh, a potentially a rule with regard to leveling the playing field across the markets that the dark pools have to have the same minimum increments as the lit markets. Um, oh, and by the way, maybe we can shrink or tighten the minimum increment. You know, there’s a penny increment, well, maybe some stocks are trade at a half a penny or even a 10th of a penny, a tighter increment, uh, that we should— 

Jon: How long did it take you to change those increments? 

Gary: – We should also address what’s called the access fees and the rebates. And then lastly, one thing we’re looking about is, when you put an order in right now on your brokerage app. If you do it on, you know, your phone or something like that, um, and it’s called a market order. That market order, 90 plus percent of those market orders do not go to the lit exchange directly. 

Jon: Right.

Gary: They go through something called payment for order flow to these wholesalers. And so, uh, we’re looking at the staff’s looking at whether those market, retail orders, outta be put in order by order competition. 

Jon: Right. But you had said last time payment forward flow was something that you thought, you know, you were looking into changing, getting rid of, and yet I don’t think that’s, that’s what occurred. And that’s, it’s a very controversial, I’ll tell you what here, here was a crazy one. We got a question from, uh, Doug Cifu, who is the, uh, CEO of Vertu. He came into the comment section and he said, “I want to be on with Gary, uh, discussing PFOF. And, uh, he has some experience in data he would happily share.” He just wants to talk with you about it. 

Gary: Well, actually, if, if, if anybody, uh, looks at, we publish my call list on a monthly basis and Doug has talked to me, uh, it’s on my call list from a month or two ago. 

Jon: Mm-hmm. 

Gary: Um, but more specifically, any data that Doug has or anybody on your following, your social media, that’s helpful for us to get that data. I would say this though, that right now the system, right now the system is tilted towards the dark market where the internalizers, the wholesalers are not playing by the same rules as the lit exchange, and we’re trying to level that. 

Jon: Right. 

Gary: Secondly, they’re measuring a price improvement, so to speak, against a faulty measuring rod. This national best bid, best offer. 

Jon: Mm-hmm. 

Gary: Doesn’t have all of the trades in it. It’s also has to stay in a penny wide—

Jon: Let me try to clarify that real quick. Just that one moment—

 Gary: – So I think, I think we’ve gotta really—

Jon: Right.

Gary: – look at, I think we have gotta look rather than own any one thing is, are we getting the best price for those retail market orders that are coming into that brokerage app? And how do we get the best competition for those? 

Jon: But what you’re saying is—

Gary: And at the same time try to level the field, right. So that we shrink some of the cost in the middle too. 

Jon: In layman’s terms you’re saying the data that’s been provided, the, the argument that payment for order flow in the unlit markets is delivering better price improvement than, uh, the general exchanges is not necessarily the correct data that that data—

Gary: It’s not, it’s not the whole story. 

Jon: Right? 

Gary: It’s part of the whole story is, is there are different rules off exchange versus on exchange— 

Jon: Mm-hmm. 

Gary: – Part of it is also they’re measuring against, uh, uh, what’s called the National Best Bid Best offer, but that so called NBBO, it doesn’t have all the trades in it.

Jon: Mm-hmm. 

Gary: – And it’s limited. It’s forced to be a penny wide. And so there’s a lot else that’s going on. So I’ve asked staff that say, “Let’s look past all that and say.” Get the best economist around, get the best advice at, including advice from your followers and the Reddit followers and so forth. 

Jon: Mm-hmm. 

Gary: And say, “How do we instill greater competition?”

Gary: It’s just, it’s, it’s like an American thing. How do we use transparency? Better disclosure. 

Jon: Right. 

Gary: How about the SCC actually writing its best execution rule rather than relying on this self-regulatory organization. 

Jon: So why don’t you then? Everything that you’re saying, I think people at home would agree with. I think their frustration is what they view as passivity. They view that it’s too slow moving and that by the time you catch up to them.

Gary: Okay. I share that frustration. 

Jon: Yeah.

Gary: Things move faster. 

Jon: Mm-hmm. 

Gary: – at times in the private sector than they do in government. And that’s our, that’s our system. It’s not just our constitutional system, but we at the Securities and Exchange Commission are paid to be very careful because we don’t write the laws, Congress writes laws. We have to do things through what’s called notice and comment rulemaking. But also we generally, and often after we finalize a rule, that’s not the end. That’s basically a moment where the market participants often then take us to court. Take the SEC into court and said, “Did we follow all of those procedural guidelines? Did we do our economic analysis appropriately and did we consider everything?” And so, uh, it is maybe slower, uh, but we’re being thoughtful. We’re being methodical, we’re staying within the law and we’re following the economic analysis and when we put out proposals, as we did on short selling, as we did on stock borrow, as we did on these insiders, uh, corporate leaders trading. Very thoughtful. We’re gonna do the same on these equity market proposals. And, um –  

Jon: I don’t think people don’t think that it’s thoughtful.

Gary: This is not a, a fast moving process. 

Jon: No, but so what they see is this, and this is if I can translate some of the frustration that we see from the questions, uh, that, that we got here, it’s this. The process that you go through for the parts of the market that are far more consequential, whether they be dark pools, whether they be, swaps and in terms of naked selling, why not just register, you know, all that, we got a lot of questions— 

Gary: Why not just what?

Jon: Why not just register each stock purchase, so to go through registration. So the idea being that, if you had to go through a registration process in terms of naked shorting or those kinds of short cells, you wouldn’t get into the situation where you would have places doing 140 percent of a short sell or things like that because the shares themselves would be registered. You know that was kind of a way that could eliminate some of the shenanigans.

Gary: I share the view and the frustration that the government moves more slowly than you wish. In terms of your question about registration. The companies, whether it be GameStop, whether it be other, uh, public companies. We have seven or 8,000 registered public companies that are registered. I think what the nature of the question is, is— 

Jon: The shares.

Gary: – what can, what can we do more to police the market? What can we do more to make the market, uh, fair for the investing public? And, um, uh, part of it is this suite of rules that I hope that we, uh, propose in the near term.

Jon: Did you propose direct registration of shares? Is that in the suite of rules? You know, because, uh, uh, you know, obviously going through the broker and the shares being held in the broker’s name or things like that. I mean, I think that direct registration was trying to find a way to address maybe these larger naked shorting or, uh, you know, what they perceive as the lack of transparency, wouldn’t that bring some order and transparency? And isn’t that how it used to work? 

Gary: Sometimes when I’m in a congressional hearing, I say, I think, “Can we have my staff and your staff talk about this?” But I think that, uh, more seriousness, I think that the companies are already registered. The GameStops, and the others are already registered. So the nature of your question, I’d have to better understand, or the nature of, it might be somebody, one of your followers question I’d really like to better understand their thought. 

Jon: I, I think what they’re saying is, uh, it’s a movement. And it is a question that came from the Reddit community, uh, that the movement is to directly register shares that are bought under the name of the person who buys them, the individual.

Gary: Oh alright. 

Jon: So not the broker. 

Gary: So I, I, now, I look, I think, I think this is an, is an issue. We’re trying to get at in a little bit different way, but one of the things is that, uh, most shares in the US, the majority of shares in the US are held in what’s called street name.

Jon: That’s right. Like the broker’s name. 

Gary: A Goldman Sachs or Robinhood, or somebody is owning, or Fidelity is owning on behalf of their millions of customers. And it’s just one name and I don’t know if that would help. And your follower on Reddit, uh, might have a good point. And I’m gonna ask staff about this, whether it would help with regard to short selling, but we are looking at this issue of street name and how to look through the street name when counting up the number of shareholders. And this is particularly important because you need to have 2,000 shareholders before you go public. And whether it’s whether, um, you know, again, uh, this is an observation that could somebody say I only have 1,900 shareholders because each of those 1,900 have tens of thousands of shareholders behind them in street name and that that’s certainly something that we’re taking a look at and trying to address.

Jon: It’s interesting cuz I think we’re agreeing on the frustration. I think, I think you’re more of a believer in the system we have in place. And I guess I’m wondering if maybe we need to readdress the system in general because of how outmanned you guys are and how agile, you know, these large financial companies are in terms of sneaking around. 

Gary: I share your frustration and I wish our agency was, had more resources, unambiguously. 

Jon: Right. 

Gary: I wish that, in our system of democracy—

Jon: Uh-oh.

Gary: -that we’d get a little bit more trust— 

Jon: So what about this then?  

Gary: – You did a, you did a number of, of, uh, podcasts on the judicial system too. And so, uh, whether we bring an enforcement action and we’re then taken into court and you get a court that overturns our enforcement action and we win more than we lose. We have like, you know, the industry trade groups or the New York Stock Exchange, then sue us. We tend to win more than we lose, but there’s always that balance.

Jon: So why not go at it? If you believe payment for order flow is a conflict of interest within the markets or it is—  

Gary: It is a conflict. 

Jon: Then why not just ban it and, and take your chances in court? Cuz I think what people see is this. When the SEC pays a half a million dollars to put out a public service announcement that basically says the problem with the markets is, you know, meme investors not doing their research or they see you go after Kim Kardashian, uh, and get a a fine on her crypto business. What they’re really, the frustration there isn’t necessarily what you’re doing. It’s what you’re not doing. It’s not putting out a $500,000 PSA warning people that are, uh, uh, practicing the PFOF or warning, the, the, the people that are not being transparent. Or warning.  Why aren’t we using those resources to apply pressure and leverage? We’re always warning individual retail people about, “Hey man, the market’s dangerous and you don’t want to get involved in this.” Rather than saying, “Let’s make the market less dangerous, so that we don’t have to warn people.”

Gary: I believe that we’re trying to do, uh, both, uh, this agenda, uh, with regard to this stock market with regard to parts of the market, we haven’t talked about the treasury market or uh, even private funds in America. The reform agenda is really critical. Our private funds market, by the way, is almost as big as our entire commercial banking sector. It’s at 21 trillion. We’re doing that, but at the same time, yes, we’re holding, uh, people like Miss Kardashian, uh, accountable, and that does send a message through the markets. We had earlier kept others accountable, uh, in, in the same way. I mean, Floyd Mayweather and, DJ Khaled and Steve Sagal. And so –

Jon: But those are, those are anomalies and, and maybe it’s important, but it’s certainly not important as holding UBS accountable and Goldman and all the larger players.  

Gary: We’re doing both or all of the above, but within limited resources and within a judicial system that’s, you know, people have rights and they’re gonna, they’re gonna challenge us. So in terms of the big firms in this past year. We had, uh, fines for Barclays and other big banks in terms of, uh, violations of the securities laws as well. We held Allianz, which is one of the largest insurance companies and asset managers accountable. Uh, and at the same time holding companies like Boeing accountable for misleading the public with regard to their airplane safety and so, it is the case. And, I’m honored to be the 33rd chair of this agency. I talked to my nine predecessors as I was getting into this job, and I talked about the jobs. I learned from them, ranging the spectrum. And there were some that, were aligned, with the investors. And there were some that were more aligned maybe with industry across nine, uh, chairs from the last 30 plus years. But all of them said, “You’re never gonna have enough time. You’re never gonna have enough resources.” And one of the things that’s changed over those 35 years, is that over the decades, We, the SEC, get challenged in court by the big banks, the big stock exchanges, the big fund companies, and their trade associations more often in the 2020s than we did in the prior decades. And so we’re very, uh, deliberate, we’re very thoughtful. We do things within the law, and we’re resources — 

Jon: But none of this makes you think we need a different system because if nine predecessors have come to you and said, “You will always be out manned.”

Gary: Oh, I, I definitely think it would be good if we had more resources, and resources would help. 

Jon: Right.

Gary: I think that it is appropriate to do things thoughtfully and carefully. 

Jon: No question.

Gary: And certainly there’s changes—

Jon: The markets want certainty sir.

Gary: -in law from Congress that would help as well.

Jon: Right. Can I ask one broader economy question before I let you go? 

Gary: Sure. 

Jon: The larger, uh, economic question is this, uh, inflation is a very complex issue, uh, one that we’re facing down and that threatens to unravel any progress that we made in terms of wages and in terms of employment. And it’s an incredibly complicated interplay between supply chain and price index and pandemics and world events. And in the United States to battle inflation, we have, it seems, only one hammer. One dial, and that’s the Fed. And it strikes me as odd that an issue as complex as inflation really boils down to one unaccountable organization, the Fed, turning a dial this way or this way. And when inflation hits, the first thing we say is, “Hey man, we gotta kick unemployment up and slow everybody down.” The profits are privatized, and the pain is socialized. And how can that be in a capitalist system that is supposedly free market?

Gary: I’m gonna try my best to stick to my job and not to jays in other people’s jobs

Jon: No no no this is broader, this is not, this of a man who has all the experience— 

Gary: Let me say broader issue. Uh, I think we are living in a time right now of economic and market uncertainty. You just went through a list, of course there’s even more. I look even in the last week and a half to two weeks and see uncertainty in what’s called the, uh, the government bond market in the UK, the guilt market.

Jon: Right.

Gary:  It’s a G7 country. 

Jon: And the treasuries here in the United States, they can’t, you know. 

Gary: And treasuries here, not quite, not quite as choppy as what we’ve seen in the UK market in the last two weeks. And this is part of the reason why. And it’s this broad agenda that we’ve included a number of projects to enhance the resiliency of our capital markets. So we have 5 of those 50 plus projects are around the US treasury markets, and we’ve worked collaboratively with the US Department of Treasury and the Federal Reserve. And we’ve put out proposals around trying to have the high frequency traders in those markets, what’s called principal trading firms register. You talked about registration earlier. 

Jon: Mm-hmm. 

Gary: Um, some of those firms that are trading high frequency trading and the treasury market are not currently registered as dealers. I think they ought to be. We put out a proposal on that, to register the trading venues, the interdealer brokers, to have more clearing in those markets. Clearing is that central plumbing that we talked about earlier.  

Jon: Mm-hmm. 

Gary: That only about 13 percent of the treasury market is in the cash market. That’s just the nature of some of the resiliency projects. We also have, uh, projects around hedge funds and what they report to the government through various quarterly filings and current filings. What I’m stepping back to say is the uncertainty in the market, um, is a reminder to an agency like the SEC that one of the jobs that we have is to try to make the markets, uh, more resilient. When uncertain times come, I see this coming out of the United Kingdom, and I go, “It’s a reminder about what we’re doing, not only in the treasury market, but in money market fines.” So, it’s a really important reminder. Your question about inflation and economic uncertainty. We, at the SEC. Are merit neutral and, I say this often. 

Jon: What, what does that mean?

Gary: It means that investors get to decide what risks they want to take. Investors, your Reddit followers or the biggest players in the market get to choose whether they want to go and buy something or sell something. But part of that is also to, uh, do our best to have a market that doesn’t spill out like the ‘08 Crisis did to all Americans. And I’ll close on this. My dad had a small business. Neither of my parents went to college and, their parents were immigrants. And, um, uh, he started a small business with his mustering out pay. He never have more than 35 employees. If he couldn’t make payroll on a Friday, the city of Baltimore wasn’t gonna bail him out. He’d have to close up shop. I think that every small business in America, every investor in America kind of gets that. I would also say for investors, and it maybe it’s a little plug of investor education is, you know, be aware of the risk.

Jon: I think people appreciate that, but I think they see that, that they do bear the brunt of the risk and there is no one there to bail them out, even though— 

Gary: No, there was no one who would bail Sammy Gensler out either.

Jon: Exactly. But—

Gary: That was my dad.

Jon: There’s always someone there to bail out the big banks and the big brokers and all those folks, and they see the unfairness within the structure of the market. And I think that’s the troubling part, is we have a system that talks about resilience and yet only one side of that equation pays the full price for uncertainty. And that’s Main Street. And I think that’s the unfortunate part. 

Gary: I’m driven by how can we make the markets more competitive, transparent, efficient for working families of this country, and how can we make it more resilient for, you know, regular folks that are just trying to make ends meet and save for a better future. But I also understand the frustrations people have as to why can’t you do things faster? Why can’t you do things, uh, more novel. And we’re here sort of sticking to our law, our economics, but we’re doing that. So everything survives court challenge, which is inevitable on the other end as well. But I thank you, Jon, for, uh, doing this interview. Who knows? Maybe we’ll do another one in 2023. 

Jon: No thank you, and I wanna thank all the people who sent in so many of those questions.

Gary: All right, Thank you. You be well. 

Jon: Thank you, sir.

Interview with Gary Gensler Ends


Jon: All right, everybody. Well, that was, uh, our, our interview with Gary Gensler, who is the, uh, chairman of the Securities and Exchange Commission. I’m sure that you are not satisfied. I am not. I’m by the way, very gracious, uh, of him to spend the time with us. I think, uh, it’s, it’s clear, uh, the frustration. I want to thank everybody who sent in questions. God knows. Uh, when we asked you if you had questions for, uh, Mr. Gensler, you rose to the challenge and sent us the ones without curse words. I think we had at least 3000 without curse words. With curse words. I have no idea how many, but there was a lot of curse words. You’re a very colorful audience. Uh, but we’re gonna continue to talk about the issues that were brought up. And by the, by, uh, the next episode of the Apple TV+ version of The Problem is on taxes and how everybody f***ing hates them, and perhaps the reasons why. Uh, so I hope you’ll tune in for that. And that’s it. The Problem with me, Jon Stewart. We’ll join you next time, bye-bye.



Jon: “The Problem with Jon Stewart Podcast” is an Apple TV+ podcast and a joint Busboy Production.