Insights From Former SEC Senior Leaders in the Division of Enforcement
Elections can dramatically shift the balance of power in the government, and in an especially consequential election between two candidates with fundamentally different approaches to policymaking, governance, and enforcement, the recent reelection of President-elect Donald Trump will have a potentially significant impact on the U.S. Securities and Exchange Commission's (SEC or Commission) Division of Enforcement program. While it is too soon to tell which direction the agency will head in following the changeover in administration, it is likely new leadership will pursue an agenda that entails a return to basics, a narrower set of enforcement priorities focused on harm to the "Main Street" investor, smaller penalties, fewer sweeps, and a lighter touch on cryptocurrency and environmental, social, and governance (ESG) enforcement. As we enter the interregnum between Democratic and Republican administrations, this Advisory will look at the SEC leadership appointment process and consider the potential implications for the Division of Enforcement program from the coming Republican-led Commission. This Advisory includes insights from former senior leaders and staff from the SEC including Dan Hawke, who led the SEC's Market Abuse Unit and was Director of the Philadelphia Regional Office; Jane Norberg, who was Chief of the Office of the Whistleblower in the Division of Enforcement; Christian Schultz, who was Assistant Chief Litigation Counsel in the Division of Enforcement; and Adrien Anderson, who was Counsel to the former Commissioner and Acting Chair Allison Herren Lee.
New Chair and Enforcement Director
Current SEC Chair Gary Gensler assumed his position in April
2021 but it is not likely he will continue beyond inauguration day
in January 2025 — whether he follows in the footsteps of his
predecessor, Jay Clayton, and departs as early as December 2024, or
stays until closer to the inauguration like other past chairs is an
open question. Even with Republican control of both the White House
and Senate, it may take several months into the new Trump
administration before a new SEC chair is nominated and confirmed.
During that time, President-elect Trump presumably will designate
an acting chair from the two current Republican commissioners,
Hester Peirce or Mark Uyeda, with Peirce seeming more likely given
her seniority among the two to serve until the new chair takes
over.
Once confirmed, the new chair will lead an agency that has pursued
an aggressive rulemaking and enforcement agenda over the past four
years. We expect the new administration to hit the brakes on that
agenda, reigning in the Division of Enforcement and returning its
focus to the most egregious frauds and intentional wrongdoing with
a diminution in the number and scope of sweeps on regulatory
compliance issues. Of course, given the news of a hypothetical
"Department of Government Efficiency" (DOGE — a
seeming play on a key supporter's favorite cryptocurrency,
dogecoin) whose mandate is generally unclear but will almost
certainly entail radical changes to the way the government does
business, it is not certain how the SEC will be impacted.
Nevertheless, in the short term, who the president picks as his
next chair will give a strong indication of how conservative an
enforcement agenda the Commission may adopt. The new chair will
appoint directors to the major divisions of the SEC, and will look
for leaders who will align with the chair's (and
President-elect Trump's) agenda. The Division of Enforcement is
one of the most important selections by the new chair and much will
depend on who the new chair selects to run the Division of
Enforcement program. Sanjay Wadhwa, the current Deputy Director of
Enforcement who is serving as the Acting Director of Enforcement
pending the transition, is known as an aggressive enforcer of the
securities laws and, therefore, will not likely be among the list
of candidates for the new chair's Director of Enforcement.
Whether he would stay on as Deputy Director of Enforcement remains
to be seen. Deputies to other current division directors are likely
to act as interim directors until those director positions are
filled by the new chair.
Bread-and-Butter Enforcement (With Reduced Penalties) Will Continue Despite Potentially Reduced Enforcement in Crypto and ESG
During the first Trump administration, Chair Clayton focused the
Commission's Division of Enforcement agenda on protection of
the "Main Street" investor and prioritized cases
involving financial reporting and misleading disclosures, offering
frauds and Ponzi schemes, insider trading, Foreign Corrupt
Practices Act actions, and other indisputably fraudulent conduct.
The first Trump administration was characterized by fewer novel and
message cases, smaller penalties, and fewer sweeps, with a dramatic
reduction in corporate penalties. This focus shifted in the Biden
administration with a heightened focus on ESG and crypto, and
numerous enforcement sweeps for recordkeeping/off-channel
communications, pay-to-play, and custody rule violations.
We expect the next Trump administration will return to a more
traditional, conservative enforcement agenda. As such, we expect to
see fewer, if any, ESG and crypto enforcement actions (other than
those involving outright fraudulent conduct with investor harm, as
discussed below), a return to the more traditional garden variety
enforcement cases that we saw during the first Trump
administration. These "black letter" actions tend to
focus on egregious fraudulent conduct that harms investors and
relegate lesser-violative conduct to a lower level of enforcement
priority. This may result in fewer individuals being charged with
direct or indirect wrongdoing in the new administration.
We anticipate corporate penalties will likely be smaller and fewer,
with more cooperation credit given as a way to lower penalties.
During the first Trump administration, Chair Clayton expressed skepticism about the efficacy of
substantial penalties on the basis that they risk punishing
shareholders for the activities of an individual bad actor.
The Whistleblower Program Will Likely Remain Robust
While we will see changes in enforcement, the SEC's Whistleblower Program will likely remain robust as it has received bipartisan support across administrations. The SEC's Whistleblower Program offers confidentiality, anti-retaliation protections, and monetary awards for information that leads to successful enforcement actions. The program has operated successfully, resulting in significant enforcement actions and whistleblower awards, and the return of money to harmed investors. Despite bipartisan support for the program as a whole, current Republican commissioners have recently voiced objections to award amounts and limited transparency into those awards. While the new Trump administration cannot, without congressional approval, adjust the statutory mandate to pay awards to eligible whistleblowers of between 10% to 30% of amounts collected, there may be more scrutiny within the Commission on how those percentages are determined, which could result in a slowdown in the pace at which awards are made. The Republican Commission may also use its rulemaking authority, as it did under Chair Clayton, to adopt rules that allow it to take the dollar amount of the award into account in determining the percentage of a whistleblower award. While this rule was the subject of litigation and ultimately unwound by Chair Gensler, it is possible we may see similar rulemaking in the new administration. Nonetheless, tipsters will continue to send information to the SEC, as well as to the other government agencies offering monetary award programs, like the Department of Justice, the Financial Crimes Enforcement Network, the National Highway Traffic Safety Administration, and the Commodity Futures Trading Commission. We anticipate these tips will continue to fuel government enforcement programs.
ESG and Climate Rules May Be Unwound
Beginning in 2021 with Acting Chair Lee, the SEC promoted an
aggressive ESG agenda, which ultimately resulted in several new
Commission rules under Chair Gensler's policymaking agenda. The
Division of Enforcement created a task force to identify and
prioritize investigations of ESG offenders. The task force brought
only a handful of enforcement actions, and the SEC's focus on
ESG slowed in early 2024 when several lawsuits were filed against
the agency challenging the newly adopted Climate Disclosure Rules
from the Division of Corporation Finance. Industry, lawmakers, and
state governments exerted pressure on the agency, resulting in a
halt to many of the ESG initiatives in place. In early fall of
2024, the Commission quietly disbanded its ESG task force which
operated for years focusing on investigations and enforcement
actions for violations of the securities laws related to ESG.
It is foreseeable that ESG policymaking will end under a
Republican-led SEC. Commissioners Peirce and Uyeda have sharply
criticized the ESG rulemakings in the past. For example,
Commissioner Peirce opposed the SEC's ESG-related financial
risk disclosure rules for public companies, cautioning that
"[w]e cannot make such fundamental changes to our disclosure
regime without harming investors, the economy, and this
agency." Commissioner Uyeda has similarly cautioned that the SEC has "gone
astray" by adopting ESG-related risk disclosure rules. While
the proposed ESG rules from the Division of Investment Management,
currently in a holding pattern, may be abandoned, the SEC is for
now continuing to bring enforcement actions against investment
advisors for misleading statements related to ESG factors,
including one last week.
Under a second Trump administration, however, with a new
Republican-appointed chair, the Commission is likely to reverse
course, unwinding most ESG initiatives and rulemaking and
de-prioritizing enforcement investigations into potential violative
activity. While the division can be expected to continue to
investigate anti-fraud matters, we expect the ESG moniker will be
jettisoned.
Likely Slowdown in Digital Asset and Crypto-Related Actions
Chair Gensler has faced criticism from industry, the public, and members of Congress for his aggressive approach to enforcement matters involving crypto. In May 2022, the Division of Enforcement renamed its Cyber Unit the "Crypto Assets and Cyber Unit," with the obvious emphasis on crypto assets reflected in the name, and expanded the staffing of this unit substantially as we have discussed previously. Chair Gensler's statements and focus on digital assets (encompassing NFTs and tokens), cryptocurrencies, and most recently crypto trading platforms reflect an aggressive view that crypto falls under the securities umbrella which requires registration and compliance with securities laws and regulations. By contrast, under Republican Chair Clayton, the SEC approached the regulation of cryptocurrency with caution, often expressing concern about stifling innovation in a fledging industry and not wanting to deter or impede legitimate cryptocurrency operators where its own authority to regulate was not entirely clear. While the Commission aggressively exercised its enforcement powers to go after plainly fraudulent conduct in most instances, the Commission refrained from adopting rulemaking to regulate the industry or, for that matter, to articulate the policies that it believes the crypto industry should follow. Given the role the cryptocurrency industry played in supporting and financing President-elect Trump's reelection, we think there will be substantially less appetite for pursuing further regulation of the crypto industry and the approach will instead go back to that of Chair Clayton. The Crypto Assets and Cyber Unit seems likely to be reprioritized with its focus shifted to cyber with little to no focus on crypto, with excess staff reassigned to other areas in the Division of Enforcement.
Conclusion
While there are many unknowns as we wait for appointments from the second Trump administration, we believe it likely there will be a return to a narrower set of enforcement priorities, smaller penalties, and fewer sweeps. We also believe there will be a lighter touch on the crypto industry and ESG, except in the most egregious of cases, and more traditional, conservative enforcement cases will become the norm.
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