By Sean Wilke, Partner & Head of Strategic Growth, Greyline Partners, LLC
After a year full of unpredictability and change, the 2020 calendar year ended with an election that brings an additional layer of uncertainty to our nation. Now that 2020 has come and gone, what does the change in administration mean for SEC regulatory priorities?
Less than four months into the new administration, President Biden has been quite active in signing into effect numerous laws and appointing members of several key administrative agencies. Amongst the most important for the securities industry is Gary Gensler, the chairman of the Securities and Exchange Commission (SEC) and former chairman of the Commodity Futures Trading Commission (CFTC). While much remains up in the air, based on Mr. Gensler’s background and initial comments, it seems relatively certain that the investment community will see a more active regulatory environment in terms of examinations, enforcement and rulemaking. A reversion back to the SEC’s “broken windows” approach of Mary Jo White’s tenure is not beyond the realm of possibility, as the first half of 2021 will set the tone for the next four years.
Under a new leadership, we can expect the following changes to occur:
New Environmental, Social & Governance (ESG) Investing Regulations
Creating oversight mechanisms for responsible and sustainable investment initiatives will almost certainly be a focus for the Commission. The U.S. lags the rest of the western world by several years in terms of ESG progression and lacks any defined regulatory framework or guidelines. With little to no oversight, there has been a proliferation of “green washing,” as firms bill themselves as ESG and/or socially responsible to attract capital allocators, without adoption of a proper monitoring program. We fully expect the SEC to examine investment advisers and carefully scrutinize representations being made to investors and take action against advisers who fail to live up to their promises. Similar actions are being undertaken by the SEC’s Division of Corporate Finance with respect to public companies’ disclosure of environmental impact, workplace and corporate diversity and political spending.
SEC Enforcement
We can expect that the administration will be more aggressive and proactive with enforcement. With a new, pro-regulation chairman in place, the SEC will likely seek to increase their hiring budget to allow for the expansion of new experts to aid in enforcement activities. The anticipated uptick will be a key departure from the last four years which saw a decline in the total number of enforcement actions outside of a handful of consolidated cases, such as those stemming from the SEC’s share class initiative which involved dozens of institutions.
Digital Assets and Cryptocurrency
From what we know about Mr. Gensler, his current resume highlights that he is a professor and thought leader on blockchain technology, digital currencies, financial technology and public policy at MIT. We are aware that as a previous regulator, we see tendencies to favor more regulation vs. less, hence we predict that he will likely continue this approach with the SEC and regulating of digital assets.
Strict enforcement on private funds and investment managers
Whereas the regulatory focus during the Trump administration was retail investor protection, we expect a greater emphasis on the practices of private funds managers – specifically, with respect to capital-raising activities, valuation, custody and new investment strategy fads.
Insider Trading
While there was a heavy focus on Covid-19 related insider trader issues in 2020, we can certainly expect the SEC to take a more active role in policing for suspicious trading activity, specifically with regard to healthcare and biotechnology sectors which saw a fair amount of speculation and volatility during the last year.
CFTC
We anticipate with the CFTC, an independent government agency, that regulates the U.S. derivatives markets to include: options, futures, and swaps, to have similar enforcement activity which has been “increasingly active during the Trump Administration” to resume with Biden. The cross-border rule, the swap dealer capital rule, and position limits rule by the CFTC are expected to be amended as well as heighten enforcement to Title VII rule to include specific disclose and reporting requirements with emphasis on market manipulation, particularly spoofing.
Conclusion
Looking ahead, with the expectation of heightened enforcement activities and supervision controlled by the Democratic Party, we strongly encourage firms to continue maintaining a strong compliance program and revisit manuals to ensure firms are meeting the evolving demands and regulatory changes. Note that proper documentation and disclosures, formulated with the help of your third-party compliance firm, will be key to helping you sleep at night and stay ahead of the ongoing changes we expect. The SEC will continue to be extremely active as they focus on increased “corporate responsibility in relation to ESG, governance and other social issues as well as ensuring enforcement has a focus on public companies and large Wall Street firms while continuing to protect Main Street investors.”
