In a Biden administration, a reconstituted SEC led by a Democratic chair and consisting of a Democratic majority will most likely launch an active rulemaking agenda, roll back Trump-era regulations, and step up its enforcement and inspections programs.
Here are the four places to look first as the SEC retires the Commission’s current deregulatory approach.
Inspections and Enforcement
Under Democratic leadership, the SEC is likely to return to more aggressive inspection and enforcement programs than that seen in recent years. The Enforcement Division under Chairman Jay Clayton has brought fewer cases than under the leadership of his predecessor, Mary Jo White, with a lower number of cases brought against public companies or large Wall Street firms.
In fact, a significant portion of the 2019 enforcement actions were in a single series of related self-reported actions by investment firms concerning cost-disclosures.
In particular, the Covid-19 pandemic will almost certainly prompt extensive SEC investigative and enforcement actions. The Enforcement Division will carefully review health care and pharmaceutical issuers’ disclosures for material omissions and misstatements, and fraud by profiteers offering bogus investments.
In July 2020, the SEC made significant changes to the proxy advisor rules. Critics, such as Commissioner Allison Herren Lee, argued that the new rules were unwarranted, as they addressed no identifiable problem. The scope of the opposition to this measure makes it a candidate for early reversal in 2021.
A to-do list of similar measures could also include recent changes to the shareholder proposal rules that make it more difficult for a small investor to submit or resubmit a proposal for inclusion in company proxy materials.
Regulation Best Interest
Financial firms have invested heavily in implementing Regulation Best Interest. Any major changes or interpretive shifts to this controversial rule would be highly disruptive to the industry, especially during the ongoing pandemic-related economic challenges.
While a new SEC chair is unlikely to seek immediate rule changes, financial firms should expect an aggressive inspection review of Reg BI compliance aligned with the active Enforcement Division direction described above. Firms can expect enhanced scrutiny and accountability of their adherence to the rule’s best interest obligations. The Commission, emboldened by active and aggressive inspection and enforcement programs, will seek to uphold investor interests and protections without causing undue disruption to the industry.
Calls for increased information and disclosure on environmental, social, and governance disclosure prompted recommendations by the SEC’s Investor Advisory Committee in May 2020. The SEC has not addressed climate change since 2010 and has required only limited line-item disclosure of other ESG concerns. Rather, each reporting company is permitted to make its own determination of materiality of ESG-related issues. Expect a heightened focus on ESG and a top place on the Commission’s rulemaking to-do list at the outset of a Biden administration.
Regardless of how the SEC responds to these recommendations, the conversation on ESG disclosures will not end anytime soon. A Democratic-led agency could amend Regulation S-K to require specific ESG disclosures relevant to investors searching out accurate, comparable, and actionable information for use in their analyses.
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