The SEC will have the power, under Democratic control, to mandate corporate disclosures on diversity and climate change risks, police more of Wall Street, and reverse recent efforts to ease capital raising in private markets in the coming years.
President-elect Joe Biden has made addressing racial equity and climate change priorities for his administration, saying he’d require companies to disclose climate risks and the racial and gender composition of their boards.
Commissioner Allison Lee, the Securities and Exchange Commission’s most senior Democrat, frequently has called for more environmental, social, and governance disclosures from companies. Democrats have also said that SEC enforcement under Chairman Jay Clayton went easy on big banks and other large corporations, and that the agency didn’t do enough to protect retail investors through its rules and policies.
How far the SEC goes in mandating more corporate disclosures and reversing Trump-era regulations and policies will hinge on the chairman, who will set the agenda for the independent agency.
“Depending on who is the next chair, the shift might be either reversion to the mean or whiplash inducing,” said Urska Velikonja, a Georgetown University Law Center professor who studies the SEC.
Potential contenders for the job include former SEC Commissioners Kara Stein and Robert Jackson, as well as Georgetown University Law Center Professor Chris Brummer, according to Bloomberg News. Former Commodity Futures Trading Commission Chairman Gary Gensler is leading Biden’s SEC-related transition work and may make a chairman recommendation.
The lack of information on a company’s workforce, climate change vulnerabilities, and other ESG topics in public filings has drawn Democratic concerns, despite some work by Clayton to expand corporate reporting on human capital.
The SEC in August approved regulations that require companies to report material “human capital measures or objectives that the registrant focuses on in managing the business,” according to the final rule document. Companies only had to report how many workers they had before the rule change.
But Lee and Democratic SEC Commissioner Caroline Crenshaw voted against the regulations, saying they didn’t include specific mandates. The agency should have required disclosures about workforce diversity and exposure to climate change risk, they said.
Steven Rothstein, managing director of the Ceres Accelerator for Sustainable Capital Markets, said Biden’s interest in climate risk reporting was very clear during his campaign. Ceres, a nonprofit founded by investors and environmentalists, has pushed the SEC to require climate-related disclosures for years.
“We expect there’ll be exciting news on climate and disclosure,” Rothstein said.
Lee and Crenshaw declined to comment for this story.
Democrats also have raised alarms that Clayton hasn’t devoted enough attention to rooting out wrongdoing on Wall Street.
Clayton’s SEC has secured hundreds of millions of dollars in penalties from Wells Fargo & Co., Goldman Sachs Group Inc., and other big firms, but combating Ponzi schemes, cryptocurrency scams, and other retail fraud has remained the chairman’s top enforcement priority.
That policy came after Obama Chairman Mary Jo White pushed a “broken windows” strategy intended to ensure firms comply with SEC rules by aggressively pursuing small violations.
Velikonja said she expects a Biden SEC to focus more on Wall Street banks and, in particular, insider trading.
“Clayton has really pulled back on the latter and I expect enforcement of insider trading returns, including against hedge funds and against politicians,” Velikonja said. “I would not be surprised if the SEC also launches an investigation into private company offering fraud, since that market has grown so much over the last five years.”
Private Market Pullback?
Clayton has received Democratic flak for his efforts to help companies raise money in the private markets without going public and facing more SEC oversight. Rule changes that expanded the pool of people who can invest in private markets and increased limits on the amount of money companies can raise in some private offerings faced opposition from Lee and Crenshaw.
The new thresholds and other steps the SEC has taken to ease capital raising in private markets “continue the steady erosion of traditional and important boundaries between the public and private markets, which further disincentivizes public offerings and threatens investor protection in both markets,” Lee said earlier this month.
Barbara Roper, director of investor protection for the Consumer Federation of America, said she anticipates that Biden’s SEC will take another look at recent private offering rulemaking and work to make private markets less attractive for companies.
“We’ve heard a lot from this administration about giving investors access to great opportunities in the private markets,” Roper said. “Giving the typical retail investor access to the private markets is a lot like giving them the right to go to Hell. They’re not going to get the best price. They’re not going to get the same information. They’re going to be at a disadvantage every step of the way.”