In November 2010, when I walked through the doors of the U.S. Securities and Exchange Commission to begin what turned out to be a decade-long career as a regulator, I was struck by how entrepreneurial a government agency could be. In the wake of the Global Financial Crisis and the Bernard Madoff scandal, the SEC was focused on increasing its own effectiveness. As part of this effort, it created units of expert investigators in its division of enforcement and gave them a broad mandate fostering a culture that valued expertise and innovation. The environment was dynamic and ambitious, yet it operated within clear boundaries. “We don’t protect investors from themselves” was a lesson I learned about the limits of our regulatory mandate.
In 2016 when I was co-leading the SEC’s private funds unit, the environment changed dramatically. With the election of President Trump, the entrepreneurial spirit of the Obama years was replaced with a “stay in your lane” mentality. This shift led to a more restrained SEC, though one that maintained a certain balance. For instance, during this time the SEC’s Republican and Democrat commissioners unanimously adopted a 430-page rule release focused on investment adviser marketing whose requirements and provisions are still being sorted through today.
The tide turned again with the election of President Biden and the appointment of Gary Gensler as SEC chair in April 2021. Under Gensler, the SEC adopted a more ideological stance, pushing for aggressive exams and enforcement while sidelining the agency’s core principles of transparency and disclosure. This approach quickly backfired.
A clear example of this was the SEC’s handling of the Private Fund Adviser Rules package. The rules proposal included several critical provisions aimed at enhancing investor transparency. However, it was also marred by vague, unnecessary, and unworkable elements that sparked panic within the private funds industry. These provisions, which sought to prohibit common business practices like allowing investors to agree to liability limitations and allowing managers to provide liquidity options for different investors, led to a swift backlash.
Even within the SEC, there was recognition that the proposal’s most extreme measures were problematic. By the time the final rules were published, they were far more practical, and the commission scaled back the controversial provisions. But the damage was done — industry groups and market participants, provoked by the initial proposal, mounted a successful legal challenge. The rules were overturned, rendering the SEC’s efforts fruitless.
Meanwhile, other rule proposals concerning ESG, cybersecurity, custody, vendor diligence, and predictive analytics have stagnated, leaving the SEC seemingly stuck in neutral.
The election this November offers a chance for a fresh start.
If the Democrats win the White House, the current aggressive regulatory environment is likely to persist, albeit perhaps in a more measured form if Gensler steps aside. SEC examinations will continue to focus on “Wall Street,” with private fund advisers facing increased pressure on their compliance budgets. Enforcement actions may target complex, esoteric issues, with the division of enforcement pushing the boundaries with novel legal theories. If the Democrats also control Congress, the SEC’s budget would grow. Rulemaking could regain momentum, though not at the breakneck pace seen previously.
Should Republicans return to power in the White House and control Congress, SEC activities will likely slow significantly, and the SEC budget could stagnate. Examinations might become more superficial, focusing on the number of registrants examined rather than on uncovering unique investor protection issues. The SEC’s marketing rule, passed under a previous Republican administration, will likely become a focal point for examinations, although some of the SEC’s most controversial recent marketing guidance could be reversed. Enforcement could shift from novel cases to more straightforward ones like Ponzi schemes and offering frauds, while crypto-related cases may dwindle. New rulemaking efforts would lean toward deregulation, with a possible focus on revising the investment adviser custody rule — a longstanding target for reform.
Regardless of who wins this election, the SEC needs to rebuild its expertise and culture. The Democrats will need that expertise to continue an aggressive enforcement approach and Republicans will need it to effectively relax regulations. Although this rebuilding effort may seem daunting, the SEC has successfully done this before.
During the latter part of the George W. Bush administration, the SEC, under the leadership of Christopher Cox, was criticized for its failures and for its politicization. Following the election of Barack Obama, the commission successfully advocated for an increased budget, which enabled it to hire outside industry experts. New leadership was installed and worked tirelessly to facilitate a cultural shift that created the entrepreneurial environment I encountered in 2010. There was a focus on improvement and growth.
Today, as financial markets grow increasingly opaque and complex, the need for renewed focus on expertise and culture at the SEC is more critical than ever. There should be a bipartisan recognition that rebuilding expertise and improving culture is critical to promoting and maintaining integrity in the U.S. capital markets. The next SEC chair must be chosen for technical expertise and leadership abilities, not a willingness to advance a political agenda. Failing to do so will further erode the agency’s effectiveness — a lesson we’ve learned all too well from recent years.
Igor Rozenblit is managing partner of Iron Road Partners, a regulatory consulting firm serving the investment management industry, and a former co-head of the SEC’s private funds unit. He is based in New York. This content represents the views of the author. It was submitted and edited under Pensions & Investments guidelines but is not a product of P&I’s editorial team.
