By Aaron Nicodemus and Aly McDevitt, 10 December 2024
Change is likely coming to the US Securities and Exchange Commission’s (SEC) enforcement priorities with the pending handover of the White House to Republican President-elect Donald Trump. Adjust your compliance priorities accordingly.
Likely out:
- The SEC’s much-debated climate-related disclosure rule, which was approved in March [1] only to be tabled in the face of legal challenges [2] a month later.
- Environmental, social, and governance (ESG) rule initiatives that are related to disclosures [3] and internal controls.
- Diversity, equity, and inclusion rules that pressured corporations to add women and minorities to their boardrooms [4] and make human capital management disclosures.[5]
- The SEC’s private fund adviser rule,[6] which had already been struck down by a federal court, will likely not be revived.
Likely in:
- Cryptocurrency and digital assets, stuck in the purgatory of a ‘regulation by enforcement’ [7] stance under SEC Chair Gary Gensler, will likely see their fortunes improve.
- Efforts to roll back some of the more controversial provisions of the Dodd-Frank Act of 2010, particularly those that affect big banks. The Gensler-led SEC expended much political capital to adopt long-lingering Dodd-Frank rules [8] over the past three years.
Fiscal year 2024 was a record-setting year at the SEC in terms of enforcement, as the agency announced it netted $8.2 billion [9] in financial remedies, its highest haul ever. More than half that total (56%), however, was comprised of the $4.4 billion settlement [10] from the successful prosecution [11] of the massive fraud by cryptocurrency platform Terraform Labs and its founder, Do Kwon.
But change in the SEC’s top leadership has already begun. Gensler recently announced that he’s leaving the agency on 20 January,[12] the day Trump will take office.
Last week, Trump nominated crypto advocate, Patomak Global Partners founder Paul Atkins, to be the next chairman of the SEC.
In the announcement, posted to his social media platform TruthSocial, Trump touted Atkins’s leadership in ‘common sense regulations’ and highlighted his experience working on and studying the digital assets industry.
Atkins has served as co-chairman of the Digital Chamber’s Token Alliance, a policy voice for crypto firms, tokenised networks, apps, and issuers, since 2017. Prior to founding Patomak, he also served as SEC commissioner from 2002 to 2008.
The director of the SEC’s Division of Enforcement, Gurbir Grewal, left the SEC [13] in October for a position in private practice.[14] He’s been replaced in an acting capacity by his deputy director, Sanjay Wadhwa.
Enforcement mandates
Despite all of these changes, and many more to come, the SEC’s core enforcement mandates will remain unchanged, said Ken Joseph, Managing Director at risk and financial advisory vendor Kroll and a former Associate Director of the SEC Division of Enforcement.
The SEC will prioritise the protection of retail investors with its enforcement actions, continuing to prosecute cases of fraud, insider trading, market manipulation, alongside other ‘bread and butter’ enforcement actions.
Other experts agreed that the SEC under a Republican majority will return to a ‘back to basics’ regulatory enforcement mindset, with ‘a narrower set of enforcement priorities focused on harm to the ‘Main Street’ investor, smaller penalties, [and] fewer sweeps,’ law firm Arnold & Porter wrote in a 14 November blog post.[15]
The pace of rulemaking at the SEC will slow dramatically under Republican leadership, predicted Amy Lynch, former SEC and FINRA Regulator and Founder and President of Frontline Compliance.
While the SEC had 37 rules in the final stages [16] at the beginning of 2024, most if not all of them will be paused under a Republican-led SEC.
Trump ‘will pull from his old playbook and put a moratorium on rulemaking at the SEC. So, no new rules unless another gets repealed,’ Lynch said.
Crypto clarity
Haima Marlier, a Partner at Morrison Foerster who spent nearly a decade working in the SEC’s Division of Enforcement, said cryptocurrency will not be eyed suspiciously by the new Trump-nominated SEC chair.
Under Gensler (and, it should be noted, under his Republican predecessor, Jay Clayton), the SEC did not enact regulations for digital assets, including cryptocurrencies, despite industry calls for it to do so. Instead, the agency chose a ‘regulation by enforcement’ stance in which the SEC punished firms when it determined that their digital asset products were securities.
With a Trump administration and Republican control of both the House and Senate, ‘This could be an opportunity to pass crypto-specific legislation,’ Marlier said. Congress makes the laws, of course, but the SEC would have a role in establishing regulations and the framework for enforcement.
SEC Commissioner Hester Peirce, also a Republican, has long advocated for cryptocurrency regulation.
‘As I learned more about crypto, I understood it was really different. I believe we need to use the regulatory side of the house to make this doable,’ Peirce said in an 18 October speech [17] before the New York State Bar Association. ‘So few companies have come in and tried to register. It’s too expensive and it’s like we are trying to jam a round peg into a square hole.’
Lynch sees the issue differently.
‘Crypto and AI (artificial intelligence) both will have free reign with no real oversight. These markets will flourish but we will also see more fraud. Another Sam Bankman Fried (crypto-fraud) type scenario could easily play out,’ she said, referring to the collapse of FTX [18] and the criminal prosecution of Bankman-Fried.[19]
Republicans have also shown an interest in reining in Big Tech, and one area of enforcement focus that could expand under a Republican-led SEC could be how investment firms and broker-dealers handle the risks posed by the AI tools they use, Joseph said.
‘They will be looking at AI-related impact on all aspects of a firm’s operations, including how it’s used in due diligence and decision-making,’ Joseph said. Firms should disclose how such tools are being used in research, in trading, and in investment advice, and should be able to show that they’ve measured the risks and taken steps to mitigate them, he says.
Waning ESG focus
ESG enforcement actions that do not involve obvious fraud, particularly related to disclosures, will likely be curtailed under a Republican-led SEC, Marlier says. The SEC already quietly disbanded its ESG task force [20] in September, another sign of a pivot in priorities.
Marlier said a Republican-lead SEC likely would not bring a case like the agency’s non-fraud enforcement action against Keurig/Dr Pepper from September, in which the company paid a $1.5 million penalty [21] for ‘making inaccurate statements regarding the recyclability of its K-Cup single-use beverage pods,’ according to the SEC.
Doug Hileman, president and founder of Douglas Hileman Consulting, agrees that the SEC’s climate-related disclosure rule will likely die on the vine and that the agency’s focus on ESG-related enforcement will also wane. However, that doesn’t necessarily mean companies need to pause efforts on climate- and ESG-related matters, he said.
‘It will surprise nobody if (when?) SEC enforcement is dialled way back. It will surprise nobody if (when?) SEC pulls the climate risk disclosure rule altogether,’ said Hileman, who has his own consultancy and is an author of the Committee of Sponsoring Organizations of the Treadway Commission (COSO)’s supplemental guidance on internal controls over sustainability reporting.
‘Companies may be tempted to pause their efforts on climate-related matters. ‘Compliance’ is no longer a driver, right? Um, no,’ he said.
Pressure to collect, analyse, and act on climate change-related and ESG corporate data will still be in place, but coming from regulators in California and Europe instead of the SEC, he said.
A company’s business partners may continue requesting data on energy use, water use, and other ESG measures.
‘Much of the sustainability risk, impact, and reporting extends beyond the enterprise into the value chain,’ he said, in contracts that companies have with their business partners, customers, and vendors.
These connections and requirements between businesses are not publicly disclosed, ‘so it’s not covered by media,’ Hileman said. ‘Nonetheless, compliance professionals see it.’
This article has been updated and republished with permission from Compliance Week, a US-based information service on corporate governance, risk, and compliance. Compliance Week is a sister company to the International Compliance Association. Both organisations are under the umbrella of Wilmington plc. To read more visit www.complianceweek.com