Topics discussed:
- Broker-dealer regulation narrows from broad proposals to essential compliance
- Investment management rules prioritize efficiency over technical compliance
- Enforcement priorities focus on traditional fraud
- Capital formation barriers reduced for both public and private markets
Transcript
The following transcript of this discussion was edited for clarity.
David Lynn: Hello, this is Dave Lynn, and I'm a partner in Goodwin's Capital Markets practice and chair of the firm's Public Company Advisory practice. This is New Directions, a series of discussions about the impact and trajectory of the second Trump administration as we approach the 100-day mark.
In this discussion, we're going to focus on some key developments at the SEC [US Securities and Exchange Commission]. I'm very pleased to be joined by my colleagues Brynn Peltz, Christopher Grobbel, and Grant Fondo.
I'm going to turn it over to Chris to get us started.
Christopher Grobbel: Thanks, Dave. I'm Chris Grobbel, and I'll be covering the first 100 days and beyond from the perspective of broker-dealers and exchanges. We'll be focusing on three key areas and what the SEC has done and might do in those areas.
In terms of prior rulemaking, the SEC withdrew its appeal of a federal court decision striking down the dealer-trader rule. This rule was designed to ensure that market makers and high-frequency traders register as dealers, but it was drafted so broadly that central banks had to be carved out. By withdrawing the appeal, the SEC is essentially signaling that that proposal is done and will not be pursued further.
Acting SEC Chair Mark Uyeda also announced that he directed SEC staff to explore reviving the 2020 proposal to apply Regulations ATS [alternative trading system] and SCI [systems compliance and integrity] to ATSs that facilitate trading and government securities. If revived, the proposal would replace the broader ATS proposal from 2022 that would have applied not only to government security ATSs but also to digital assets and communication protocol systems. These signals regarding the dealer-trader and ATS proposals may provide some insight into other controversial market structure proposals. Based on this pattern, several other proposed rules may also be abandoned, including those concerning best execution, order competition, and volume-based pricing for certain order executions.
The SEC has also been transparent about a return to focusing on traditional cases. What does this mean for brokers and exchanges? I think it's a return to focusing on core broker-dealer compliance functions, including things like maintaining adequate net capital, protecting customer assets, and misappropriation.
Proper disclosures to customers about products and conflicts of interest, conducting proper due diligence, advertising and communication review supervision, recordkeeping — these are the basic focus areas of a broker-dealer. I think we'll see the SEC's focus return here.
On the trading side, the focus could include market manipulation, layering and spoofing, and insider trading. It seems that the SEC may be back to basics on some of these things. I think that changes at the top will be mirrored at division levels. For example, the Crypto Assets and Cyber Unit is no more and has been replaced by the Cyber and Emerging Technologies Unit. I think this signals a continued focus on, at a minimum, cybersecurity.
Cybersecurity concerns are kind of evergreen. I also think AI will grow in importance for the SEC as that technology improves and its use becomes more ubiquitous within the industry. In 2024, for example, the SEC appointed a chief artificial intelligence officer. I believe there will be a continued focus on AI.
Along those lines, in terms of cyber and AI, it's possible that the new administration could address each of these via rulemaking — via what I'll call slimmed-down, narrowly tailored versions of the rulemaking for cybersecurity and digital engagement practices that was proposed under the prior administration.
Finally, another Clayton-era proposal that could see daylight again would be the conditional exemption for finders. This was initially proposed late in 2020, but it was never adopted. Creating clear guidance around the use of finders would be consistent with one pillar of the SEC's tripartite mission — facilitating capital formation — and this could be an example of the SEC's future direction.
Brynn Peltz: Thanks, Chris. I'm from our New York office and head our Investment Funds regulatory group. I'm going to discuss the new administration from the perspective of investment management.
We're looking forward to more market-friendly regulation and reduced regulatory burdens. There's no way to sugarcoat the fact that it's been rough under Gary Gensler. What we're hearing from Acting Chair Uyeda, and what we're expecting from Paul Atkins, are things that are going to facilitate innovation while maintaining investor protection.
I recently attended a conference where Uyeda discussed the SEC's shift toward more thorough rulemaking processes instead of regulatory shortcuts that have previously led to litigation challenges. He emphasized the need for extended comment periods to facilitate public participation and interagency collaboration. Uyeda also addressed several key points: extending compliance deadlines for upcoming rules to give affected parties time to implement necessary policies; reconsidering controversial proposals like the safeguarding-of-assets rule, which included real assets such as real estate; providing clearer guidance on crypto custody; reducing numerous environmental, social, and governance proposals; and achieving regulatory goals through exemptive relief rather than formal rulemaking. As an example of this last approach, we anticipate the SEC will permit share classes for exchange-traded funds in the near future.
This approach is very welcome from the investment management perspective. The examination environment has been particularly challenging, but we expect positive changes to SEC examinations of investment advisers. We anticipate greater efficiency, with the SEC attempting to do more with fewer staff resources. This will likely include more-targeted examinations focused on high-risk advisers, increased transparency during the exam process, and potentially allowing settlements to be negotiated during exams rather than escalating issues to formal investigations and enforcement actions.
So we expect the SEC to be really looking for more balanced outcomes, evidence of real fraud, and violations of fiduciary duty, as opposed to what we've been experiencing in the past four years. We saw a lot of technical violations, such as checking the wrong box on Form ADV, and fines for issues that really are just technical, haven't been problematic in the past, and were doing no real harm to investors.
In terms of facilitating innovation, we anticipate several positive developments: new products entering the market, increased utilization of AI, potential expansion of the accredited investor definition, and broader access for retail investors to traditionally institutional-only products such as private equity, infrastructure investments, and, of course, digital assets.
And with that, I will hand it over to Grant.
Grant Fondo: Thanks, Brynn. I'm Grant Fondo. I'm based in our Silicon Valley office, and I am a co-chair of our Digital Currency & Blockchain group as well as part of our White Collar group.
On the enforcement side, which is what I'm going to focus on, we've really seen a sea change in this administration. Under the Gensler administration, you had regulation by enforcement, and we also saw sort of a jurisdictional land grab with the SEC trying to grab as much of the jurisdictional framework as it could. That's really changed now. So what you've seen is two things, I think: one is a change in tone and a desire to bring in industry in a cooperative and constructive manner, and the other a dropping of and slowing of enforcement, which I'll get into in a second.
On the cooperation side, we've seen a number of roundtables, which some of us have spoken about. We saw there's a crypto task force that has had a couple of roundtables already and is going to have a few more — bringing industry leaders in to talk about trying to develop a clear regulatory framework, rather than simply filing lawsuits against the industry.
Similarly, in the AI arena, we had a roundtable in late March that was focused on the financial industry. The goal is to provide much greater clarity than in the past.
On the enforcement side, it's been pretty remarkable, something I've never seen in my many years of practice: You have the SEC just dropping lawsuits and dismissing them. You see that in the crypto industry in particular, where the SEC has dropped pretty much every major lawsuit they had. You're seeing this in other areas as well. Chris spoke about the appeal being dropped in the dealer rule, but there was also a lawsuit in a federal court in Connecticut against a hedge fund that the SEC walked away from. This is pretty unprecedented territory.
What does this mean as far as where we think the SEC is going with enforcement? I agree with my other colleagues in that you are going to see a lot less technical enforcement actions brought. I think the focus will be on fraud. We've seen so far in the past 60 to 90 days a slowdown in enforcement, but the SEC is still bringing fraud-based actions. For example, they brought an action against individuals for defrauding investors in a bond offering. We are also seeing activity in private companies relating to investor fraud. So you're going to still see SEC activity in the fraud arena, but that's where I think it's going to stay for the most part, and you'll see less of it than we have historically.
David Lynn: Thank you, Grant. I will wrap things up by talking about some of the initiatives the SEC is undertaking with regard to capital formation. There's clearly been a pivot toward promoting capital formation compared to what we observed over the past four years. Acting Chair Uyeda's remarks have signaled that the SEC will explore several potential areas on the public side, including expanding the "emerging growth company" concept from the JOBS Act by enhancing disclosure accommodations and revising qualifying thresholds, reconsidering the duration of emerging growth company status, reviewing filer classification issues that determine company reporting timelines, scaling disclosure requirements so smaller companies face less-extensive reporting obligations than larger ones, and potentially allowing smaller companies to use shelf registration even without being listed on a public securities exchange.
At the same time, the SEC staff has been putting out a series of updates or changes in their guidance in an attempt to facilitate capital formation. This included enhancing the accommodations that are available to companies for the nonpublic review of draft registration statements so that companies can submit a draft registration statement and an expanded number of circumstances and not have to file it and have it become public in order to initiate the SEC review process.
There were also interpretations that enhanced the ability to file and get effectively a short-form registration statement on Form S-3 in the period between when the company files its annual Form 10-K report and when it files its proxy statement, which presented issues for companies over the years.
Then on the private side, or exempt side, for capital formation, there's been talk about revisiting the "accredited investor" definition, looking at potential ways to simplify and clarify requirements for exempt offerings across the board. The staff, as in the public side, has put out some interpretations that have clarified the verification methods that can be used under Rule 506(c) of Regulation D, which seem to be helpful in terms of making that a practical exemption that people can use and in a wider range of circumstances. We're likely to see a number of proposals from a rulemaking perspective, revisiting both the public side and the private side of capital-raising. We've also seen a lot of efforts in Congress to initiate potential changes similar to what we saw with the JOBS Act back in 2012. I think that will come together to provide the SEC with enhanced authority and an approach to revisit some of the difficulties that companies face in the capital-raising process.
That's all we have for today. Be sure to check out the other discussions in our New Directions series as we provide more insights on the administration's evolving policy. Thank you very much for listening.
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