United States: Change And Continuity In Securities Regulation

The election of Donald Trump as the next President and the continued Republican control of Congress raise questions as to what changes may be expected at the Securities and Exchange Commission (SEC or Commission) and what may stay the same. Although Mr. Trump has called for a repeal of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), he has provided few specifics about changes to the federal securities laws and what role he expects the SEC to play, what type of SEC Chair or other Commissioners he is likely to nominate, or how the financial markets would be policed.

Current SEC Chair Mary Jo White already has announced that she will be stepping down at the end of the Obama Administration, leaving three Commissioner openings for the Trump Administration. The President-elect's transition team for the independent financial agencies is being led by Paul Atkins, a former SEC Commissioner with a deregulatory focus. He will provide recommendations regarding financial regulation policies and personnel. In addition, Sharon Brown-Hruska, who is a former Commissioner and acting Chair of the Commodity Futures Trading Commission, has been named to Mr. Trump's landing team for the SEC.

In addition, the Financial CHOICE Act (CHOICE Act),1 proposed during the current Congress by Representative Jeb Hensarling (R-Texas), Chairman of the House Committee on Financial Services, and cited with approval by the transition team, may provide some indication of potential changes the Trump Administration or Congress may seek to make to the Dodd-Frank Act. With a deregulatory focus by the incoming Republican Administration, and with the House and Senate both under Republican control, there is the potential that significant changes in policy and direction could be implemented at the SEC, including changes in personnel, authority, budget and policy.

Many key components of securities regulation, however, would likely remain unchanged. Despite concerns about various aspects of the SEC's approach to regulation and enforcement, both Republicans and Democrats appear to recognize the importance of the SEC's role in maintaining the preeminence and integrity of the US securities markets. Accordingly, challenges to the SEC's core focus are unlikely to develop. In addition, although the leadership at the SEC will change—including, in all likelihood, the directors of the major operating divisions—most of the experienced professional staff at the SEC likely will remain in place, thereby providing some continuity in how the SEC carries out its mission.

Given the fluidity of the regulatory environment, making accurate predictions regarding what to expect from the SEC under a new Administration and a new Chair is difficult. Nevertheless, in this Client Alert we explore possible key areas of securities regulation that may be affected under the new Administration.

1. SEC Chair and Commissioners

The SEC consists of five Commissioners, each of whom is appointed by the President with the advice and consent of the Senate. Their terms last five years and are staggered so that one Commissioner's term ends on June 5 of each year. The Chair and Commissioners may continue to serve approximately 18 months after their terms expire if they are not replaced before then. No more than three Commissioners may belong to the same political party, a structure that is designed to reduce partisanship on the Commission. The President also designates one of the Commissioners as Chair of the SEC. In practice, with a new administration, this means that the President will nominate a Commissioner who will serve as Chair.

Currently, there are only three SEC Commissioners. Earlier this year, President Obama nominated George Washington University law professor Lisa Fairfax and George Mason University law professor Hester Pierce to fill two vacancies on the Commission. Both nominations stalled in the Senate and the nominees are unlikely to be confirmed before President-elect Trump takes office. In addition to deciding upon an SEC Chair to nominate, President Trump will have to evaluate whether to resubmit one or both of those earlier nominations to the Senate or to instead select nominees of his own.

Chair White is an independent, Commissioner Kara Stein, whose term ends in June 2017, is a Democrat, and Commissioner Michael S. Piwowar, whose term ends in June 2018, is a Republican. As President, Mr. Trump will have the immediate opportunity to fill the Chair's position and the two vacancies on the Commission. We expect that two of his appointments will be Republicans, while one will be a non-Republican (e.g., Democrat or independent). In addition, during his Presidency, Mr. Trump also will have the opportunity to appoint new Commissioners to replace Commissioners Stein and Piwowar when their respective terms are up. All these appointments will be subject to Senate confirmation.

In considering the potential effect of the Trump Administration on the SEC, we note that the SEC is an independent agency. Therefore, as a practical matter, the Trump Administration may make recommendations as to how the SEC will act going forward. The Administration, however, cannot compel the SEC to follow those recommendations.

2. Mechanisms for Change

The Trump Administration could seek to implement changes in securities regulation by asking Congress to (i) amend or replace the relevant statutes (with or without SEC involvement); (ii) adopt legislation to change SEC rules or regulations; and/or (iii) decrease and/or redirect the SEC's budget (again, with or without SEC involvement). In addition, the new Administration could advocate that the SEC (i) amend or repeal existing or pending SEC rules and regulations; (ii) issue interpretive guidance; and/or (iii) change enforcement and other staff priorities. The processes for changing statutes and regulations are complicated and generally time-consuming. Set forth below is a summary of the potential methods for making changes to existing requirements at the SEC.

  • Statutory Changes. Congress could adopt new legislation to amend and/or replace existing statutes applicable to the SEC based on recommendations from the Administration, the Commission or on its own behalf. For example, the proposed CHOICE Act seeks to amend or repeal large portions of the Dodd-Frank Act that affect the SEC, both directly and indirectly. In general, adopting new legislation would require a majority of votes in the House and, because of the threat of a filibuster, which Democrats have indicated they are likely to use, 60 votes in the Senate.2 With the Republican majority in place in the Senate after the recent election, eight Democratic Senators, in addition to all Republican Senators, would be needed to reach 60 votes in the Senate. The adoption of new legislation would likely involve protracted and complicated negotiations both within the Republican Party and with Democrats, although it is always possible that some less controversial legislation could be adopted quickly.
  • SEC Changes to Existing Rules.

    • With a new Chair and Commissioners, the SEC could vote to repeal or amend previously adopted rules and regulations.3 Such a repeal or amendment would ordinarily be subject to the notice and comment process, as well as cost-benefit analyses in certain cases. Accordingly, the repeal or amendment of an existing rule likely would take months to implement. The SEC could invoke the "good cause" exception to notice and comment (reserved essentially for emergencies) to accomplish a rule change immediately. Nevertheless, the Commission would have to show a compelling reason to dispense with the public notice and comment period if challenged. It also may be possible for the SEC to propose repeal of a current rule and, at the same time, announce that it will not enforce the rule until the new rulemaking is complete. The SEC also could adopt rules on a temporary basis, while seeking comment (for example, an interim final rule suspending certain requirements). Similarly, for rules that have been adopted but have not yet taken effect, or whose compliance dates have not yet been reached, the SEC could extend effective dates to provide it time to conduct a notice and comment rulemaking. An indefinite suspension of a rule could raise legal issues under the Administrative Procedures Act and might be challenged in court.
    • Congress also could repeal or amend any SEC regulation by adopting new legislation to make such a change. The process for adopting new legislation is the same as discussed above. In addition, subject to certain limitations, the Congressional Review Act establishes certain time periods during which Congress can review and disapprove a final rule.4
  • Changes to SEC Guidance and Interpretations. In contrast to an SEC rule, the Commission may issue guidance and interpretations, which are not subject to a notice and comment period as long as they do not amount to a "legislative rule."

    • In determining whether "guidance" or an "interpretation" voted on by the Commission is a legislative rule requiring notice and comment on the one hand, or a policy statement or interpretive rule not requiring notice and comment on the other, a court will look to the actual legal effect of the agency action and the agency's own characterization of its action. A court also will consider whether the agency action creates a substantial regulatory change. Adoption of binding norms will likely be a legislative rule. A statement on how the agency intends to enforce an existing legal norm probably is a policy statement. A construction of an existing norm is likely an interpretive rule.5 Therefore, as long as the SEC does not adopt new binding norms, issuing new guidance and interpretations could be done more expeditiously than changes to the rule itself.
    • The CHOICE Act contains provisions that would prohibit the Commission from voting on any interpretation or guidance without conducting formal notice and comment.6 Given that the CHOICE Act originally was offered under a Democratic Administration, however, a Republican Administration may not reintroduce this provision, because Congress may not want to constrain the new leadership of the SEC. On the other hand, Congress and others tend to object to what they view as rulemaking through interpretation by an independent agency, so the approach in the CHOICE Act may reappear in new legislation.
    • Agency staff also could change the SEC's direction through issuance of guidance on which the Commission does not vote. Staff-issued guidance, such as "FAQs" often published regarding a new rule, would not amount to a legislative rule. In general, however, new leadership brought in by a new SEC Chair would be unlikely to change course on matters of significance without at least seeking concurrence from the SEC Chair. Moreover, certain Republicans have criticized "informal rulemaking" by the SEC staff through means such as enforcement decisions, no-action letters or accounting guidance, rather than statutorily mandated procedures, thereby raising the question as to whether such methods would be utilized.

3. Budget

In recent years, Congress has made various efforts to limit the SEC's budget. For example, the CHOICE Act provides for greater Congressional constraints on the SEC's finances, including a cut in the SEC's annual budget of almost $700 million.7 Although such efforts were unsuccessful under the Obama Administration, the Republican Congress could act to reduce the SEC's budget. Any such reduction could lead to shifts in priorities at the SEC, as well as an overall reduction in enforcement, rulemaking and other agency activity.

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1. The CHOICE Act, which was passed by the House Financial Services Committee on September 13, 2016, is styled as an Amendment in the Nature of a Substitute to H.R.5983 Offered by Mr. Hensarling of Texas (September 12, 2016), and is available at http://financialservices.house.gov/uploadedfiles/bills-114hr-hr5983-h001036-amdt-001.pdf.

2. Congress also could propose budget reconciliation legislation to avoid the 60-vote requirement in the Senate; such legislation only needs a majority (that is, 51 votes). It is unlikely that substantive legislation of the type involved in changing the securities laws would be subject to reconciliation. It is also possible that the Republican Senate majority could modify or abolish the filibuster.

3. In general, a quorum of the Commission consists of three members, provided, however, that if the number of Commissioners in office is less than three, a quorum consists of the number of members in office. 17 C.F.R. § 200.41 (2016). As a practical matter, if the vacancies have not been filled by the time Chair White departs, any action by the Commission will require the assent of both Commissioners.

4. 5 U.S.C. §§ 801-808 (2012).

5. See Securities Industry and Financial Markets Association, et al. v. United States Commodity Futures Trading Commission, 67 F. Supp. 3d 373 (D.D.C. 2014).

6. Section 412, Title IV.A of the CHOICE Act.

7. See, e.g. Title IV.A and X.D of the CHOICE Act.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Thomas W. White
Matthew A. Chambers
Matthew T. Martens
Mark D. Cahn
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