"Finance since antiquity has tended towards concentration."

Gary Gensler U.S. Securities and Exchange Commission Chair

So says Gary Gensler, chair of the U.S. Securities and Exchange Commission (SEC), in a fireside chat with Eric Pan, CEO of the Investment Company Institute (ICI). Pan and Gensler spoke this morning from the main stage at the 2024 ICI Leadership Summit at the JW Marriott in Washington, D.C. (Pan noted that this is the third time Gensler has spoken at the annual conference.)

In a conversation that ranged across multiple topics, Gensler mentioned concentration multiple times. He noted the late Jack Bogle's concerns on this front and highlighted the concentration in the ETF space among the big three (though he didn't name the firms or specify his concentration-related concerns). And the regulator also mentioned concentration in the context of Pan's concerns about smaller asset managers' difficulties adapting to new rules and regulations.

"It becomes really, really hard for them to bear the cost, the operational challenges with these rules," Pan says. "This is an evergreen problem."

"We spend a lot of time thinking about how to promote competition in the markets," Gensler says, noting that the SEC sometimes used phased or even tiered implementation of rules to help smaller firms adapt. Yet he also noted that, when it comes to investors working with fund firms big or small, "they need the same protections."

Gensler defended the SEC's 2023 money fund regulation, which (among other things) introduced a mandatory liquidity fee for institutional money market funds. Pan noted that the initial proposal in 2021 did not describe the liquidity fee in detail enough for firms to comment on.

"It has proven to be a tremendously complicated mechanism," Pan says, noting that he sees multiple firms exiting the institutional prime money fund business before the expected implementation of the reg this October. "Does that surprise you?"

"I'm very proud of the work that we did. I'm standing by that," Gensler says, noting that the secondary market for commercial paper and certificates of deposit is under particular stress in tough times. "The risk in the money market fund field was more accentuated in this one area ... Institutional investors, they understand that risk, and they start to pull out money even faster."

"I think the system's safer and will be even safer after October," Gensler adds.

When Pan asked if Gensler is ok with the institutional prime money fund business shrinking, Gensler noted that supporting money funds "became a very real consideration for policy makers" in 2008 and 2020. He shared concerns about there being an explicit or implicit government guarantee backing money funds and noted that other regulators (though not the SEC) want money funds to fall under authorities like the fed.

"The reduction of the prime institutional market, was that a feature or a bug?" Pan asks.

"The rsk of institutional prime money market funds was on our minds as policy makers," Gensler says.

Pan also briefly mentioned the recent advent of spot bitcoin ETPs and the possibility of spot ethereum ETPs down the line. Gensler didn't spend much time on cryptocurrency-related ETPs, but he did take on a broader question.

"Why have you been so uncomfortable with crypto?" Pan asks.

"It comes down to the rampant noncompliance with U.S. law. It comes down to the frauds and scams," Gensler says. "Some of the leading lights of the field are now in jail, awaiting jail, or awaiting extradition."

Gensler added that, despite the "cryptocurrency," most such tokens "do not operate as currency" for people, "unless you're involved in illicit activity" like ransomware.

"This field is not decentralized. A number of significant players at the middle of this market sometimes call themselves exchanges," Gensler says. "They're operating in ways that are conflicted. We'd never let a traditional exchange trade against their customers."

"They're so deep with conflicts," Gensler adds. 

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