SEC Chairman Nominee Expected to Usher in Era of Increased SEC Enforcement, Regulation
The Situation: President Joe Biden nominated Gary Gensler, former Chairman of the Commodity Futures Trading Commission ("CFTC") under the Obama administration, for Chairman of the Securities and Exchange Commission ("SEC").
The Question: If confirmed by the U.S. Senate, what should companies expect from the SEC under Gensler?
Looking Ahead: Gensler will likely usher in an era of heightened SEC enforcement and regulation, focusing in particular on industry-shaping enforcement actions and rulemaking related to financial technologies and ESG disclosures.
Biden Nominates Gensler to Lead SEC
President Joe Biden selected Gary Gensler as his nominee for Chairman of the SEC. If confirmed, under Gensler's leadership, companies can expect more robust enforcement—especially for Wall Street. Indeed, investor protection advocates have heralded Gensler's nomination based on his track record of advocacy for investors. Companies can also expect increased regulation targeting financial technologies and environmental, social, and corporate governance ("ESG") issues.
Gensler's background provides some insight into how he will likely lead the SEC. Gensler previously served as Chairman of the CFTC under the Obama administration. He led the CFTC during the five years that followed the 2008 financial crisis and developed a reputation as an aggressive enforcer. Under his leadership, the CFTC heightened financial regulation and brought significant enforcement actions against major national banks accused of manipulating LIBOR. While implementing the 2010 Dodd-Frank Act, Gensler also led the charge for new rules covering over-the-counter derivatives markets. Prior to his time at the CFTC, Gensler served as Assistant Secretary of the U.S. Department of Treasury from 1997 to 1999. He also helped write the Sarbanes-Oxley Act, passed in 2002. Before going into public service, Gensler was an investment banker at a global financial institution for 18 years.
After leaving the CFTC, Gensler moved into academia and served as a professor at the Massachusetts Institute of Technology, where he focused on blockchain, cryptocurrencies, and other financial technologies.
While Gensler's nomination is pending before the Senate Banking Committee, SEC Commissioner Allison Lee is serving as the Acting Chair of the Commission.
What to Expect Under Gensler
Increase in Enforcement Activity. Although SEC enforcement was active during former Chairman Jay Clayton's tenure, companies can expect an uptick in enforcement activity under a Democrat-appointed Chairperson. Gensler's aggressive enforcement track record at the CFTC, coupled with a focus on COVID-19 fraud-related investigations, will likely lead to a significant increase in the number of enforcement actions initiated by the SEC. Aside from an anticipated increase in volume, Gensler is also expected to change the nature of these actions by focusing on:
- Industry-shaping cases;
- Major financial institutions; and
- Private funds, coupled with a focus away from offering fraud.
Yet-to-Be-Named Director of Enforcement Will Also Have an Impact. While Gensler himself is expected to have a significant impact on SEC enforcement if confirmed, 2021 will also bring a new Director of Enforcement at the SEC. Again, Gensler's tenure at the CFTC provides insight into how he may approach this staffing decision. While CFTC Chairman, Gensler hired a former federal prosecutor, David Meister, to serve as CFTC's Director of Enforcement. He may look to someone with a similar profile, as several of his predecessors have done. Meanwhile, Associate Director of Enforcement Melissa Hodgman is the Acting Director of Enforcement.
Changes to Clayton-Era Rules and Regulations. Under the Trump administration, the SEC focused on modernizing the existing regulatory framework—a goal former Chairman Jay Clayton viewed as a "particularly effective means to advance each component" of the SEC's mission. While Gensler may continue this modernization work, particularly in the area of financial technologies, he may also look to push through more investor-protection reforms, as former SEC Chair Mary Jo White did under the Obama administration. Some of these reforms may impact regulations passed during Clayton's tenure. For example, under former Chairman Clayton, the SEC issued Regulation Best Interest, or "Reg BI." Reg BI requires broker-dealers to recommend financial products to their customers that are in their customers' best interests only. Gensler may seek to fortify that regulation by defining the standard for "best interest," which the SEC has not yet done. Even if the SEC does not revisit the rule, brokers can expect Gensler to strengthen Reg BI through aggressive enforcement.
Additionally, the SEC recently enacted new rules for proxy advisors that require them to provide corporate issuers with advance notice of the positions they will recommend and to consider the issuers' responses. These rules, which were passed over the objections of the Commission's two Democratic members, do not take full effect until 2022. A Gensler-led Commission may use this window to reconsider and revise these Clayton-era proxy rules.
Increased Oversight of Electronic Trading Companies. Gensler may also look to respond to the day-trading frenzy that occurred during the COVID-19 pandemic with increased oversight of electronic trading companies. The increased market accessibility offered by these firms has come at a cost, as evidenced by the recent GameStop and AMC short squeezes. As the market becomes more volatile—in part due to the influx of inexperienced investors—investors will look to the SEC, and Gensler in particular, to help combat this volatility.
Shift in Regulatory Priorities Toward Financial Technologies and ESG Disclosures. Gensler's expertise in financial technologies uniquely positions him to focus on regulation of blockchain, cryptocurrencies, and initial coin offerings. Gensler previewed some of his views on these issues, previously expressing his belief that blockchain technology "needs to come within [the] public policy framework." However, he also separately emphasized the importance of flexibility and cautioned against the over-regulation of emerging financial technologies, warning that it would likely stifle innovation. While stakeholders can expect increased regulation of financial technologies under Gensler's leadership, the SEC will likely aim to strike a balance that allows for growth and innovation in a market that, according to Gensler, can "change the world of finance."
Under Gensler's leadership, the SEC is also likely to develop new rules related to ESG disclosures. The SEC previously declined to standardize or make mandatory ESG disclosures, instead requiring public companies to disclose ESG risks only if they deem the risks material to their business. This approach was criticized, particularly in the context of climate change-related disclosures. When the SEC proposed amendments to modernize its MD&A disclosure requirements in January 2020, Commissioner Allison Lee sharply objected to the proposal because it did not "make any attempt to address investors' need for standardized disclosure on climate change risk." This is expected to change under a Democrat-controlled Commission, which will likely enact rules that make climate-change disclosures mandatory. Similarly, while the SEC recently adopted amendments that require "human capital" disclosures, those amendments do not require companies to disclose board or workforce diversity statistics. A Commission led by Gensler is expected to go further and require companies to disclose this information.
Three Key Takeaways
- If Gensler is confirmed by the Senate, companies should expect an increase in SEC enforcement activity under his leadership as SEC Chairman, including matters brought against significant financial institutions with the goal of shaping industry standards.
- Gensler will likely focus on promulgating industry-defining regulations related to financial technologies, including blockchain and cryptocurrencies.
- Public companies can anticipate new rules related to ESG disclosures, with a particular focus on mandated disclosures related to climate risk and workforce diversity statistics.
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