After eight years of the U.S. Securities and Exchange Commission (SEC) being led by former enforcement regulators and criminal prosecutors, we can expect to see some changes in the agency under Donald TrumpDonald TrumpGraham says he hopes that Trump runs again Trump says Stacey Abrams 'might be better than existing governor' Kemp Executive privilege fight poses hurdles for Trump MORE’s incoming administration.
The President-elect has announced that his nominee for SEC chairman will be Wall Street lawyer Jay Clayton. His background is similar to past Republican appointments who have headed the agency, and, as the first chairman in years to have no experience working in the government, he will not bring a prosecutor’s mindset to his new role.
In making his announcement, President-elect Trump stated, “We need to undo many regulations which have stifled investment in American businesses, and restore oversight of the financial industry in a way that does not harm American workers.”
It is clear that the Trump administration, and the SEC specifically, will attempt to undo portions of the oversight adopted after the 2008 financial crisis and recession. It is also widely expected that Congress will consider repealing significant parts of the Dodd-Frank Act.
One can question whether it is the best public policy to enact hundreds of pages of legislation imposing regulations under one administration, and then when power changes hands, enact hundreds of pages of legislation to undo those regulations, and then when power changes hands again, presumably enact hundreds of pages more to re-enact the regulations, and so on.
At a minimum, this impairs businesses' ability to plan for the future. Nonetheless, that is the world that we in the financial regulatory industry now seem to face.
Moreover, the SEC will be down to two commissioners after Jan. 20. President-elect Trump will have the ability to nominate one more new Republican member in addition to the chairman. Once the agency is up to its full complement, we will likely see even more changes in policy. Those changes certainly will not be tilted toward increased regulation.
The Dodd-Frank Act imposed significant rule making initiatives on the SEC, which have largely been adopted at this point. Some of the more controversial SEC rules under Dodd-Frank have not yet advanced. Those proposals are probably now relegated to the dustbin. These include rulemaking over derivatives and executive compensation disclosure.
If the statute is gutted, a large part of the SEC’s agenda may be undoing recent rules. However, because these SEC rules that are currently in place were congressionally mandated, it is unlikely that the SEC will repeal any Dodd-Frank regulation on its own without a further congressional mandate.
One can expect the SEC will focus more on capital formation and facilitation of public offerings. It is encouraging that Clayton the proposed new SEC chairman, has a strong corporate finance background and deep understanding of the markets.
He also has extensive experience representing large financial institutions, so there is certainty that the new chairman will understand complex financial instruments and their impact on the markets.
While the appointees by President Obama also had extensive regulatory experience and often were not given enough credit for their sophistication and understanding of the markets, their focus was more on enforcement initiatives than on capital formation. That may have been in large part due to the post-2008 environment in which they found themselves. But what is clear is that there will be a shift in the SEC’s focus now.
In other areas of the SEC’s activities, we are unlikely to see significant changes. The SEC’s successful whistleblower office, which has brought in $584 million in sanctions, will probably not be disbanded because it may be politically difficult for Congress to eliminate the ability for whistleblowers to receive rewards for reporting actual fraud.
In addition, the professional enforcement staff of the SEC is largely self-executing. They will continue to investigate and prosecute fraud cases no matter who is in charge. When the staff presents new cases to the SEC for approval, even the staunchest Republican members of the commission have routinely authorized them.
Finally, if we face another large corporate scandal or financial crisis, the agency will quickly pivot back toward more regulation and oversight. However, we may see a decrease in the size of corporate penalties extracted as part of settlements. There may be less focus on enforcement actions against private equity and hedge funds.
We could also see the agency abandon the SEC’s current policy to require admissions of wrongdoing in certain cases, although this policy has been used sparingly, so its abandonment would not cause a material change in approach.
The nominee for SEC chairman has significant international experience and served on a bar committee critical of aggressive enforcement of the Foreign Corrupt Practices Act, so that area also may receive less emphasis under the Trump administration.
In sum, the Trump-appointed SEC is destined to shift toward a less regulatory bent and to focus more on capital formation. The extent of these changes will depend largely on how much Congress repeals or revises the existing regulatory framework, and as a result, all of us in the financial regulatory industry will be watching very closely.
Brian Miller served as special counsel to U.S. Securities and Exchange Commissioner Steven M.H. Wallman during the Clinton administration. He now chairs the securities litigation practice at Akerman LLP.
The views of Contributors are their own and are not the views of The Hill.