What a [socialist...] democrat-controlled SEC might look like and what it would mean for markets

https://www.cnbc.com/2020/11/11/what-a-democrat-controlled-sec-might-look-
like-and-what-it-would-mean-for-markets.html

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

Who will be SEC commissioner? Gary Gensler, who aggressively implemented 
the Dodd-Frank Act when he was the Obama administration’s chairman of the 
Commodities Futures Trading Commission, is in charge of the Biden 
transition team’s review group of the Federal Reserve and banking and 
securities regulators, which would include the SEC. 

There are no obvious choices, but given that Democrats are historically 
aggressive on regulation to protect consumers and enforcement of those 
regulations, some feel it’s likely that a prosecutor-type would get 
serious consideration. 

“Inspections and enforcement actions will likely increase, because they 
have not been very high under the current administration,” said David 
Franasiak, an attorney with Williams & Jensen specializing in corporate 
law. 

(Note: according to the SEC, cases brought from 2017-2020 were about the 
same as those brought from 2013-2016, and examinations, on average, were 
greater during the 2017-2019 period than 2015-2016.)

Nick Morgan, a partner at Paul Hastings LLP and a former SEC senior trial 
counsel, told Law360 that “given Preet Bharara’s history with President 
Trump, he seems a likely candidate.” President Donald Trump fired Bharara 
as U.S. attorney in Manhattan in 2017 when he refused to resign.

Others agree that an “aggressive” candidate stood a good chance of 
approval.  “Maxine Waters is in charge of the House Financial Services 
Committee, and they (the Democrats) will look to her for regulatory 
guidance,” said Pat Healy of Issuer Advisory Network. “I think she will be 
a swing vote in who gets appointed.”

What would the SEC priorities be?
“You will see more climate-related and ESG related policies,” said Jim 
Angel, associate professor of finance at Georgetown University. “They will 
look at ESG disclosures, like climate and risk disclosure -- how much 
carbon and greenhouse chemicals are you putting into the air?”

Indeed, expansion and standardization of environmental, social and 
governance principles was the most commonly referenced priority when I 
spoke with SEC watchers. More involvement in corporate governance, climate 
change, worker pay, worker treatment, diversity and health care.

SEC Commissioner Allison Herren-Lee, a Democrat who could be interim chair 
as a new chair is considered, has recently argued that the agency should 
consider standardized reporting by public companies and investment funds 
regarding climate risk. What does the SEC have to do with climate risk? In 
a recent speech to the Practicing Law Institute, Herren-Lee argued that 
the SEC is tasked with protecting investors, facilitating capital 
formation and maintaining fair, orderly and efficient markets. 

“Broadly, we must ensure that we work with fellow regulators to understand 
and, where appropriate, address systemic risks to our economy posed by 
climate change,” she said. “To assess systemic risk, we need complete, 
accurate, and reliable information about those risks,” which she said 
starts with public company disclosure.

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

To many observers the requirement to “disclose” risks around climate 
change masks a broader agenda:  “What is the goal here? Is it to get 
companies to disclose environmental risk, or is the goal to use disclosure 
requirements to require companies to take climate action?” one longtime 
SEC observer who asked to remain anonymous told me.

Another longtime observer, who also asked to remain anonymous, echoed that 
sentiment: “Disclosure is used as the hook. The way this is advanced is, 
‘Oh, it’s just disclosure.’ And then if you don’t have a policy around, 
say, climate change or diversity, it becomes a shaming exercise for 
companies that don’t have procedures that fit with a certain line of 
thinking.”

“These are matters not germane to the SEC,” the same person went on to 
say.  “They are trying to bootstrap social agenda items into investor 
protection and disclosure, but it’s not the SEC’s role to solve these 
problems.”

A bigger push for public markets?
The SEC has recently moved to make it easier for some people to invest in 
private companies. Tyler Gellasch, executive director of Healthy Markets, 
said the Democrats will likely try to pull more companies — particularly 
large ones that have remained private for years — into the public markets.

“The SEC has been aggressive in expanding the pool of private markets, 
making it easier to raise money,” he said. “A huge part of the market has 
gone dark, in private equity hands. The Democrats would likely try to 
reverse those trends. They would say once you are a big enough company, 
you should be a public company. You can’t go through an endless round of 
fundraising to stay private.”

Regulation Best Interest
Regulation Best Interest, known as Reg BI, was a 2019 rule that required 
broker-dealers to recommend only financial products that were in their 
clients’ “best interest” but not require that they act as fiduciaries. 

That did not sit well with Democrats. “They don’t describe a fiduciary 
standard, but they would likely make everyone including brokers a 
fiduciary,” Franasiak said.

“The big fight is likely over compensation schemes,” Angel said. “The pro-
fiduciary crowd [the Democrats] basically wanted to eliminate sales 
commissions, and said advice should either be charged by the hour, or as a 
percentage of assets under management. The anti-fiduciary crowd didn’t 
want to change anything, and realized that any new regulations would 
increase their compliance costs.”

Shareholder proposal rule
The SEC also recently adopted new rules for shareholder proposals. Under 
the old rule, a shareholder was required to have continuously held for one 
year at least $2,000 in market value, or 1% of a company’s voting 
securities, to be for inclusion in the proxy materials.

The new rule requires a shareholder to 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 shareholder proposal rule is right up there with some of the 
regulations the Democrats would like to roll back,” said Chris Nagy, 
president and founder of KOR Trading, noting that both Democratic 
commissioners dissented from that proposal.

Don’t expect quick changes
Those expecting quick movement on a new chairperson are likely to be 
disappointed, Nagy said. 

“Don’t look for immediate appointment of a new chairman,” Nagy said. “The 
Republicans will not want to have a quick nomination early.  Right now 
[assuming Chairman Clayton resigns] you have a 2-2 commission, so if you 
had a Democratic chairperson appointed, you would have a 3-2 SEC 
commission, with Democrats in the majority. The Republicans want to drag 
that out as long as possible.”

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