ARTICLE
14 November 2024

Major Changes Ahead At The SEC In The Trump Administration

Under the second Trump administration, the Securities and Exchange Commission (SEC) is likely to see broad changes in regulatory and enforcement initiatives once...
United States Corporate/Commercial Law

Under the second Trump administration, the Securities and Exchange Commission (SEC) is likely to see broad changes in regulatory and enforcement initiatives once Chairman Gary Gensler leaves the commission, as is expected. Gensler is likely to step down in the early days of Trump's presidency, as is customary of political appointees when party control flips. Republican Commissioners Mark Uyeda or Hester Peirce are expected to serve as interim chairperson until a successor is nominated by Trump and confirmed by the Senate. A Republican-led SEC will likely attempt to roll back the Biden administration's controversial climate disclosure rule, among other partisan rulemakings. The SEC is also anticipated to shift its approach to enforcement, especially with respect to digital assets.

Rulemakings

Like in 2017, President Trump is expected to swiftly freeze any ongoing or recently finalized regulations issued by executive departments and independent agencies, including the SEC. This is a routine action taken by presidential administrations when party control of the White House changes. Congress may also play a role in halting eligible final rules by using the Congressional Review Act (CRA). The CRA enables Congress to issue a joint resolution of disapproval to invalidate a final rule in its entirety by a simple majority vote in both chambers. The joint resolution of disapproval must be introduced within a 60-day legislative day lookback period, and the current time frame of the lookback period is approximately early August. Notably, if a rule is reversed via the CRA, agencies are barred from promulgating substantially similar rules in the future.

Under Gensler, the SEC regulated at a breakneck speed, which insulated many of its signature rulemakings from the CRA lookback period. Trump's SEC could also undo Gensler-era SEC regulations by proposing changes that would eliminate or modify final rules. This effort would require the use of the notice and comment period as per the Administrative Procedure Act (APA), which could take months, if not years, to revoke or modify those rules. In the interim, the commission may issue new guidance as well as no-action letters to indicate how it will approach enforcement on certain activities regulated by rules finalized during the Gensler era. The SEC could also opt to stop its defense of rulemakings currently undergoing litigation.

In addition, Congress can use the annual appropriations process to limit the reach of rulemakings. Appropriations language might include prohibitions on the use of funds for certain rulemaking purposes, such as prohibiting the use of funds for finalizing proposed rules or carrying out enforcement of final rules. However, this method does not nullify existing regulation, and any final rules will continue to be binding.

Climate Disclosure Rule and ESG

On March 6, 2024, the SEC finalized a historic set of climate disclosure rules that were originally proposed by the commission in 2022. Although the final rule abandoned controversial "Scope 3" provisions, it is one of the most significant public disclosure regimes since the Sarbanes-Oxley Act and will have a meaningful impact on registrants. Brownstein's summary is available here. The rule quickly faced litigation, including a series of cases filed across the country that were consolidated by the Judicial Panel on Multidistrict Litigation (MDL) into a single proceeding before the U.S. Court of Appeals for the 8th Circuit. Before the case was consolidated, the petitioners successfully obtained an administrative stay in the U.S. Court of Appeals for the 5th Circuit pending review. When the Trump administration takes over, it is likely to take efforts to roll back the rule under the notice and comment period and simultaneously likely take a different approach than current efforts in ongoing legal proceedings. As noted above, this could include choosing not to defend the lawsuits. Chairman Gensler's SEC also proposed a rule on enhancing ESG disclosures in June 2022, although the rule has not been finalized and will likely remain unfinished when Trump takes office.

Other Rules

Broadly, the SEC will shift away from enhanced disclosure regimes and focus on policies to increase market access and support innovation. The SEC's Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure final rule released on July 26, 2023, could be a target for modification or reversal. Additionally, the SEC's Spring 2024 Regulatory Agenda lists rules on corporate greenwashing and human capital disclosures as in the "pre-rule" stage, although they will likely be shelved during the Trump administration. Other rules in this category include: incentive-based compensation arrangements, safeguarding advisory client assets and predictive data analytics, among others.

Enforcement Activity

With respect to digital assets, Chairman Gensler's SEC took the position that most digital tokens are securities under the Howey test, and thus must be registered under the Securities Act of 1933. The now infamous Howey test, named for the 70-year-old case SEC v. W. J. Howey Co., has been the SEC's main source of regulatory authority. In that case, the U.S. Supreme Court held that an investment contract is a "security" if it involves "an investment of money in a common enterprise with profits to come solely from the efforts of others." This approach led to a "regulation by enforcement" approach to digital assets, yielding the agency significant legal victories and fines against crypto and stablecoin issuers.

Trump's SEC is likely to reverse course on this approach; as described by Commissioner Uyeda, "the commission's war on crypto must end, including crypto enforcement actions solely based on a failure to register with no allegation of fraud or harm." Uyeda added that "President Trump and the American electorate have sent a clear message. Starting in 2025, the SEC's role is to carry out that mandate." Alongside the change in enforcement posture, the SEC may promulgate new regulations to clarify the definition of digital assets as it relates to existing laws or by issuing no-action letters in the absence of congressional action.

Expected Staffing Changes

As mentioned, SEC Chairman Gary Gensler is expected to step down in the early days of the Trump administration and will be replaced by Republican Commissioners Mark Uyeda or Hester Peirce on an interim basis. Gensler is not obligated to step down once the new administration takes over; however, it has been customary that chairpersons resign when a different party wins the presidency. Trump is allowed to appoint his own acting SEC chairperson from day one, although there are legal questions about whether he could remove a former chairperson from the agency if they stay on or if the former chairperson could continue to serve as a commissioner for the rest of their term. Assuming Gensler steps down, the balance of power at the SEC would include two Republican commissioners and two Democratic commissioners, effectively grinding the commission's decision-making body to a halt until a Trump-nominated SEC chairperson is confirmed. While it is currently unknown which individual Trump may select, they are likely to usher in a new approach across the board on disclosures, capital formation and digital assets.

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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