The incoming Biden administration has nominated former financial regulator Gary Gensler to run the US Securities and Exchange Commission as the regulatory body looks to regulate institutional alternative data usage more stringently.

Gensler, a former chair of the Commodity Futures Trading Commission and Goldman Sachs partner, is expected to take a tougher stance on financial industry regulation if confirmed by the US Senate. Under Gensler’s direction, the regulatory agency will benefit from increased resources and a stronger enforcement and examination posture, according to trade organisation ACA Compliance Group.

Other potential new priorities for the agency include encouraging board diversity, cracking down on stock buybacks and developing a taxonomy for climate risk disclosures — which could have an impact on how ESG alternative data is collected, according to published reports.

Though Gensler has yet to make any official statements about his priorities as head of the regulatory agency, industry professionals also expect him to continue the SEC’s work on regulating alternative data usage by large investment management firms. Over the past 12 months, the regulator has started investigating funds’ use of alternative data more seriously — in January 2020, it added alt data to its list of investigation priorities for the first time.

Since then, industry sources have said that the SEC’s Office of Compliance Inspections and Examinations is investigating how at least two large funds are using alternative data. In particular, web-scraped data is a big focus, with the regulator apparently asking those funds to provide large amounts of information on how they are conducting their due diligence.

It’s also rumoured the regulator could publish a risk alert soon on their findings, which may provide guidance into how funds should approach alt data moving forward.

"With Gary Gensler as SEC chair, there likely will be increased rulemaking and enforcement activity similar to his prior efforts to regulate Wall Street when he was chairman of the CFTC," said Kelly Koscuiszka, special counsel at Schulte Roth & Zabel LLP. "In the alternative data space, that could mean new regulations governing hedge funds’ use of alternative data, or enforcement actions against hedge funds for violations of Rule 204(A) of the Advisers Act in instances where there is inadequate vendor due diligence. We also may see insider trading cases against vendors or funds if the data products contain MNPI obtained in breach of a duty.”

While Gensler hasn’t made any specific public statements on alternative data, he did mention the topic in a lecture delivered to students at MIT’s Sloan School of Management, where he works as a professor. In that presentation, delivered in April 2020, he explains how alternative data users could face challenges under laws like the Fair Housing Act and Fair Credit Reporting Act when using alternative data and machine-learning models to make consumer lending decisions.

The Biden team also announced it was nominating Rohit Chopra to lead the Consumer Financial Protection Bureau. Chopra currently serves at a commissioner on the Federal Trade Commission and helped launch the CFPB after the 2008 financial crisis.

Before assuming their positions, Gensler and Chopra must first be confirmed by the Senate, with hearings expected to start in the coming weeks.

Photo by JOSHUA COLEMAN on Unsplash