Like sand through an hourglass: Gensler puts ‘intermediaries’ in regulatory crosshairs

Gary Gensler seems to put as much effort into the rhetoric he uses to describe his regulatory goals as he does into rulemaking itself. The SEC chairman comes up with a trope and then repeats it to ensure that the message gets through to his targets.

As Gensler makes clear almost every time he speaks in public, he is focused on increasing efficiency and competition in the markets. He wants to do that by wringing costs out of the middle, where “intermediaries” do their work.

The metaphor that Gensler uses to illustrate intermediaries is an hourglass. In a speech last month at the Securities Industry and Financial Markets Association annual conference, Gensler described intermediaries as being at the “neck of an hourglass,” where the grains of sand flowing through are money and risk.

“Financial intermediaries, like market makers, exchanges and asset managers, sit at the neck of that hourglass, collecting a few grains in each transaction,” Gensler said via video to the SIFMA gathering. “With trillions of grains flowing through daily, a few grains of sand can really add up. Those grains may potentially become excess profits above what robust market competition would provide — also known as economic rents.”

As Gensler later acknowledged, the SIFMA audience was largely comprised of intermediaries. One of them was a former SIFMA chairman, John Taft, who is now vice chairman of Robert W. Baird & Co.

Taft rejected the Gensler metaphor for intermediaries. He casts them in a more positive light. Essentially, they’re the people who make possible the capital formation that leads to economic growth and community development.

“I certainly don’t see myself as extracting sand from the hourglass,” Taft told me a couple of days after Gensler’s speech when we met at the National Press Club in Washington. “I believe financial services professionals perform a public service. [The financial industry] doesn’t restrict the flow. It facilitates it. When we do what we’re supposed to do, when we play the role society expects us to play, everybody’s better off.”

I heard Gensler use the hourglass trope when he spoke to reporters following his appearance before the Senate Banking Committee in September. He said that he himself had been one of the intermediary hands taking a few grains of sand when he was on Wall Street, where he worked for many years at Goldman Sachs.

But intermediaries are found far beyond Wall Street. They live and work in most cities and many towns across the country. They include retail investment advisers and brokers.

The fact that the investment advice sector is home to many intermediaries was not lost on Karen Barr, chief executive of the Investment Adviser Association. Gensler appeared, again via video, at an IAA conference in late September.

During Q&A with Gensler, Barr pushed back against the notion that advisers are simply the middle men and women between stock issuers and investors. She said they help clients with a range of financial challenges, including saving for education and retirement and responding to life events like marriage and divorce.

“They are not just some middle person,” Barr said. “They are providing a very important service to their [clients], and it should be valued on its own, not just as a connector.”

Advisers also facilitate the public good through their role in bond offerings for local projects and similar activities, Taft said. As a reporter, one of his inspirations for getting into finance was covering development in Lowell, Massachusetts.

Taft’s emphasis on public service is based in part on his family background. As he explains on the homepage of his blog, his great-grandfather was William Howard Taft, the 27^th U.S. president.

“Like many others, I’m in this industry because I want to do good,” Taft said. “The narrative about our industry is overly negative. Try to imagine a world without financial markets. It’s not possible.”

The idea that advisers are making a mint at the neck of the hourglass also fails to reflect the current market, Taft said. Fees have been plummeting for years.

“The cost of financial services today is about as low as it’s ever been,” Taft said. “Yet we have a regulatory agenda and an SEC that is as active as what we had in 2008-09.”

Despite pushback from people like Taft, Gensler is unlikely to slow or change his game plan to squeeze as much savings as possible out of the middle of the markets.

He outlined several rulemaking initiatives in SIFMA speech and said they “are designed to lower the cost to issuers and raise the return for investors, using the tools of transparency, access and fair dealing to promote greater competition.”

You’re in the middle, InvestmentNews readers. It’s a position that is likely to become uncomfortable.