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What a democratically managed SEC might seem like and what this could imply for the markets

An exterior view of the headquarters of the US Securities and Exchange Commission in Washington.

Jonathan Ernst | Reuters

What would a democratically controlled Securities and Exchange Commission look like? It's early morning, but speculation is already raging on Wall Street.

Who will be the SEC Commissioner? Gary Gensler, who aggressively enforced the Dodd-Frank Act as chairman of the Obama administration's Commodities Futures Trading Commission, is responsible for the review group for the Federal Reserve's Biden Transition Team and for banking and securities regulators, which would include the SEC .

There aren't any obvious choices, but given that Democrats have historically been aggressive about regulations designed to protect consumers and enforce those regulations, some feel it's likely that a prosecutor will be seriously considered.

"Inspection and enforcement actions are likely to increase as they have not been very high under the current administration," said David Franasiak, a corporate lawyer with Williams & Jensen.

Nick Morgan, partner at Paul Hastings LLP and former SEC chief counsel, told Law360: "Given Preet Bharara's history with President Trump, he seems like a likely candidate." President Donald Trump fired Bharara as a U.S. attorney in Manhattan in 2017 when he refused to resign.

Others agree that an "aggressive" candidate had a good chance of winning. "Maxine Waters is responsible for the House Financial Services Committee, and they (the Democrats) will be soliciting regulatory guidance," said Pat Healy of the Issuer Advisory Network. "I think she'll be a swing vote on who gets appointed."

What would the SEC's priorities be?

"You will see more climate-related and ESG-related actions," said Jim Angel, associate professor of finance at Georgetown University. "You will be looking at ESG claims like climate and risk claims – how much carbon and greenhouse chemicals are you getting into the air?"

In fact, expanding and standardizing environmental, social, and governance principles was the most cited priority when I spoke to SEC observers. Greater involvement in corporate governance, climate change, employee compensation, employee treatment, diversity and health care.

SEC Commissioner Allison Herren-Lee, a Democrat who could serve as the new chairperson as interim chair, recently argued that the agency should consider standardized reporting on climate risk from public companies and mutual funds. What does the SEC have to do with climate risk? In a recent speech at the Practicing Law Institute, Herren-Lee argued that the SEC's job is to protect investors, facilitate capital formation, and maintain fair, orderly and efficient markets.

"By and large, we need to ensure that we are working with other regulators to understand and, if necessary, address the systemic risks posed by climate change to our economy," she said. "In order to be able to assess systemic risk, we need complete, accurate and reliable information about these risks," she begins with the disclosure of public companies.

She went on to encourage the development of more standardized disclosures around ESG in general.

For many observers, the requirement to "disclose" risks related to climate change hides a broader agenda: "What is the goal here? Is to get companies to disclose environmental risks or is the goal to use disclosure requirements to help companies Obligation to take climate action? ”A longtime SEC observer who wanted to remain anonymous told me.

Another longtime observer, also asking to remain anonymous, echoed that sentiment: "Disclosure is being used as a catch. The way this is being pushed is," Oh, it's just disclosure. " 39; And if you don't have policies on climate change or diversity, for example, it becomes a shame for companies that don't have procedures that go with a particular mindset. "

"These are matters that are of no concern to the SEC," the same person continued. "They're trying to get social agenda items into investor protection and disclosure, but it's not the SEC's job to resolve those issues."

A bigger boost for the public markets?

The SEC recently moved to make it easier for some people to invest in private companies. Tyler Gellasch, executive director of Healthy Markets, said the Democrats would likely try to lure more companies – especially large ones that have been private for years – into the public markets.

"The SEC has aggressively expanded the pool of private markets and made it easier to raise funds," he said. "Much of the market has gone dark in private equity hands. Democrats would likely try to reverse these trends. They'd say if you're a big enough company, you should be a public company. You can't pass it." an endless round of donations to keep you private. "

Regulation best interest

Regulation Best Interest, known as Reg BI, was a 2019 rule that required broker-dealers only to recommend financial products that were in the "best interests" of their clients but not required to act as trustees.

That didn't go well with the Democrats. "They don't describe a fiduciary standard, but they would probably make anyone, including brokers, a trustee," Franasiak said.

"The big battle is likely to be over compensation systems," said Angel. “The bulk fiduciary (the Democrats) basically wanted to eliminate sales commissions, and that advice should be billed either on an hourly basis or as a percentage of assets under management. The fiduciary didn't want to change anything, and realized that new regulations would increase their compliance costs. "

Shareholder proposal rule

The SEC also recently passed new rules for shareholder proposals. The old rule required a shareholder to have held at least $ 2,000 in market value, or 1% of a company's voting securities, for a continuous year for one year to be included in the proxy filing.

According to the new regulation, a shareholder must have continuously held voting securities with the following market values ​​for these periods:

$ 2,000 for at least three years, $ 15,000 for at least two years, $ 25,000 for at least one year.

"The rule for shareholder proposals is in line with some regulations that the Democrats would like to reverse," said Chris Nagy, president and founder of KOR Trading, noting that both Democratic commissioners opposed the proposal.

Don't expect quick changes

Those expecting a quick move from a new chairman will likely be disappointed, Nagy said.

"Don't look for an immediate appointment of a new chairman," said Nagy. "Republicans are not going to want a quick early nomination. Right now (assuming Chairman Clayton resigns) you have a 2-2 commission. So if you had appointed a Democratic chairman, you'd have a 3-2 SEC commission with Democrats in the majority. Republicans want to pull that out for as long as possible. "

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