As the incoming Trump administration prepares to take office, businesses and investors can expect significant shifts in the enforcement priorities of the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). After seeing increased SEC and other regulatory activity in areas like climate-related disclosures, ESG investing and cryptocurrency regulation, the new administration is poised to revisit or scale back these efforts. However, the core enforcement focus on traditional areas like insider trading, market manipulation, and financial statement fraud is likely to continue unabated. This blog post examines the key areas where we anticipate regulatory rollbacks, as well as the potential expansion of enforcement in other domains like sanctions and foreign investment reviews.
SEC and CFTC Enforcement
We anticipate that the incoming Trump administration will move to install enforcement chiefs at both the SEC and CFTC who will roll back some of the more novel enforcement trends of the last few years in the following areas:
- Climate-related disclosures: In the past four years, the SEC has sought to use the federal securities and disclosure laws to require companies to disclose the impact of their operations on carbon emissions and climate related risks. We expect that the incoming administration will roll back these efforts, and possibly even reverse climate-related disclosure rules implemented by the SEC under the current administration.
- ESG investment funds: Relatedly, we expect the incoming administration may open investigations into asset managers who offer ESG investment funds.
- ESG investment decisions: We would expect that the SEC would no longer promote requirements that certain asset managers (such as those investing for ERISA funds) consider ESG risks when making investment decisions.
- DEI disclosures: We would anticipate that the SEC may roll back requirements that companies disclose their DEI efforts in their annual financial statements. We would also anticipate that the SEC may withdraw support for board diversity rules required by certain stock exchanges.
- Insider trading: The current SEC has pursued more novel theories of insider trading, including the still amorphous and expansive "shadow trading" theory. We would expect the incoming administration to re-examine the SEC's current aggressive enforcement approach. At the same time, we would still expect the SEC under the incoming administration to continue to prosecute insider trading under more traditional, well-established theories.
- Crypto assets: The current SEC has vigorously pursued cases against crypto coin offerings and other crypto social platform schemes involving investors under the securities registration laws. We expect a Trump administration will take a narrower approach to the types of crypto offerings that trigger the securities registration laws. It is also possible the Trump administration may determine that crypto assets should be regulated as commodities rather than securities and transfer oversight of crypto offerings to the CFTC.
- Trading in crypto derivatives: The CFTC currently views trading in derivative instruments based on crypto assets as within its jurisdiction. At this time, we do not believe that there is any indication that the incoming administration may deviate from this policy.
We would also caution that we would not expect to see either the SEC or the CFTC leadership, under the incoming administration, abandon those agencies' core areas of enforcement under the federal securities laws and the Commodities Exchange Act, respectively. Indeed, during the first Trump administration, CFTC enforcement was fairly robust. We would expect that both agencies would continue to investigate the activities of broker dealers and asset managers with respect to their core fiduciary, reporting, and disclosure obligations, and continue to investigate market manipulation, insider trading, and traditional corporate accounting and financial statement fraud.
AML and CTA Regulations
Recent FinCEN regulatory action requires certain registered investment advisers to implement AML policies, notwithstanding the amount of assets managed. These regulations will likely impose a compliance burden on smaller investment advisers. We could expect to see the next administration either roll back such AML requirements or hold the line on implementing additional AML regulations outside of the banking industry.
One area, however, where uncertainty exists is with respect to the use of AML laws to scrutinize the banking activities of the cannabis industry. The current administration has endorsed a policy of permitting banks to accept deposits for legal operators in the Cannabis industry (in those states where it is legal to engage in the trade of cannabis products) provided they file Suspicious Activity Reports and undertake diligence to ensure that the deposits they are receiving are from legitimate operators. It is unclear whether the incoming administration will continue this approach or permit the industry to take the next step required to expand its retail operations by allowing the industry to access credit card networks. We note that previously, Mr. Trump has indicated he is in favor of allowing states to regulate marijuana.
Relatedly, a Trump administration may also revisit new regulations that may be impacting businesses more than anticipated, like the Corporate Transparency Act (CTA), which requires certain companies operating in the United States to report their beneficial ownership to FinCEN. We note that Project 2025 explicitly calls for the repeal of the CTA. At the same time, there may be others in the new administration who favor the goals of the CTA because it will assist regulators in identifying legal entity accounts that may be used for illicit purposes, such as narcotics trafficking or sanctions evasion. We also note that the CTA was passed in Congress with broad bipartisan support, so repeal would be difficult, especially with narrow Republican majorities in both houses. Instead, FinCEN may use its authority under the CTA to create additional categories of reporting exemptions to lessen the burden of the law on small businesses.
CFIUS
We would expect the Trump administration to continue the current administration's focus on inbound investment from China and other adversaries and possibly even expand the scope of national security review of inbound investments by the Committee on Foreign Investment in the United States (CFIUS), an inter-agency department that includes the U.S. Commerce and Treasury Departments. The Biden administration has increased its scrutiny of Chinese investment into critical and emerging technology companies, particularly in the biotech and AI space. Under a Trump administration, we would expect that in-bound Chinese investment into more traditional areas of the economy, such as manufacturing, would also receive heightened scrutiny. CFIUS could also become a protectionist tool used to review in-bound investment by foreign nationals from U.S. allies, such as Japan, that could result in a change of control of U.S. manufacturing and energy businesses to foreign ownership. Project 2025 calls for CFIUS to be strengthened including by developing a more robust mitigation monitoring program, expanding its jurisdiction to greenfield investments, and imposing more penalties for regulatory violations. The document also recommends making the Department of Defense a co-chair of the Committee along with the Treasury Department.
Similarly, we would expect the incoming administration to continue the current administration's increasing national security review of outbound investment into China in areas where there is a concern that such investment could result in the transfer of American technology to China. Recently-finalized regulations on outbound investment in China will likely need to be clarified by the Trump administration, and it also seems likely that the incoming administration will seek to broaden the scope of covered technologies under the new regulatory scheme.
U.S. Sanctions
In the area of sanctions enforcement, we expect that a Trump administration will continue the vigorous use of sanctions as a tool to achieve foreign policy objectives and will adjust U.S. sanctions to align with the administration's foreign policy. We would expect recalibration of the U.S. approach to Russia sanctions. The Biden administration, since the Russian invasion of Ukraine, has extended economic sanctions over many sectors of the Russian economy and has broadly used sanctions against Russian nationals who may be operating in sanctioned economic sectors and companies. Recently, the Biden administration has been focusing on imposing so-called secondary sanctions on persons alleged to be assisting Russia with evading sanctions, with a strong focus on Chinese entities. The incoming administration may seek to take a tougher line on Chinese evasion efforts while simultaneously signaling a willingness to offer Russia sanctions relief in exchange for a negotiated end to the conflict in Ukraine.
On the other hand, we anticipate that the incoming administration will increase sanctions against Iran and against the Venezuelan regime. This would be in-line with the Trump administration's anticipated more hawkish approach to both Iran and Venezuela. One area where we would expect a continuation of the current administration's approach is in the use of sanctions against companies tied to the Chinese military-industrial complex. We note that OFAC has not instituted a country-specific sanctions program on China; rather it has used existing sanctions authorities to target Chinese persons. In addition to the use of tariffs, the Trump administration could seek to increase pressure on China with a more targeted country-specific sanctions regime. Regardless of the adjustments in approach, we continue to expect robust sanctions enforcement and would caution businesses engaging in international trade, making international investments, or receiving in-bound foreign investment to continue to be diligent in their sanctions compliance. Similarly, we would caution asset managers to diligence their international investments as well as incoming sources of investment to ensure compliance with the sanctions laws.
Originally published 11 November 2024
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