Second Trump administration expected to bring changes to SEC rules, enforcement and court battles

Under a second Trump administration, the Securities and Exchange Commission is likely to see a series of changes. That includes a revision of its rule-making agenda, a step back from cryptocurrency enforcement, and the possible death of SEC rules being challenged in court, sources said.

“There’s going to be a lot of rule-makings that just die,” said Anya Coverman, president and CEO of the Institute for Portfolio Alternatives, a trade organization advocating for alternative investments.

Though it’s not traditional for the SEC to completely shift its existing positions when a new administration comes in, “one can imagine that with some controversial issues, which include those in which lawsuits have been brought, that there may be more of a likelihood of the commission rethinking,” said Marc Elovitz, co-managing partner at law firm Schulte Roth & Zabel, and chair of its Investment Management Regulatory & Compliance Group.

SEC Chair Gary Gensler has often received criticism for what some say is an overstep of the agency’s authority, as he pioneered several controversial rules during his tenure since April 2021.

One of those is the climate disclosure rule, which requires public companies to disclose climate-related information in their registration statements and periodic reports. The rule, finalized in March, has seen nine lawsuits filed against it, which the 8th U.S. Circuit Court of Appeals in St. Louis agreed to hear on a consolidated basis. In April, the SEC voluntarily halted implementation of the rule while the court hears the case. More than 15 institutional investors and several environmental groups filed amicus briefs in the 8th Circuit defending the rule Aug. 15.

“There’s no question that the Republicans would want to reverse (the climate rule),” said John C. Coffee Jr., the Adolf A. Berle Professor of Law at Columbia Law School and director of its Center on Corporate Governance.

Coverman also said the rule is unlikely to see any movement in the future.

“If for any reason, our rule (on climate disclosure) is stayed or overturned, many U.S. companies will need to comply with what's going on over in Europe,” Gensler said in a Nov. 14 speech at the Practising Law Institute’s Annual Institute on Securities Regulation in New York. In July 2023, the European Commission finalized sustainability reporting standards that require large companies and companies listed in Europe to regularly report on climate and other ESG risks and impacts.

However, the climate disclosure rule is only one of several SEC rules currently being challenged in court. The agency’s rule expanding the statutory definition of a dealer faces a lawsuit filed by three trade associations in March, as well as a lawsuit filed by two crypto groups in April. In December, three trade groups filed a lawsuit against a set of rules requiring increased disclosure of short-sale-related data and securities lending data.

If a court overturns one of the agency’s rules, then a Republican-led SEC may decide not to appeal the ruling, but rather accept the outcome and move on, sources agreed. Elovitz said he thinks “there's a real possibility” of that happening for the cases filed against the dealer rule and rules on short-selling and securities lending data.

Alternatively, Coffee said the SEC could vote to settle litigation brought against an agency rule, noting that past cases have found the executive branch has considerable discretion in deciding when to settle and on what terms.

The SEC’s Office of Inspector General released a report Nov. 4 warning that the agency should prepare for an increased number of challenges to its rules, now that the Supreme Court has overturned the Chevron deference.

The Supreme Court decision, released in June, overturned the 40-year precedent that said judges should defer to regulators when laws are ambiguous and unclear.

“With heightened judicial scrutiny, agencies, including the SEC, must continue to develop a thorough administrative record, including meaningful opportunity for public participation and reasoned responses to public submissions,” the report said, noting the SEC already invests resources toward that end, but additional litigation is likely.

Given this, Elovitz said he hopes the agency will ensure it can show a cost-benefit analysis for each rule. He contended that the SEC has recently shown a sense of “regulate first, ask questions later,” and “rules were being imposed because they sounded like they would be useful, but without evidentiary support to back up utility of the rules.”

Coffee said that if the SEC “wants to take a lower profile, it may do things without adopting a rule.” For example, the SEC could ask companies to disclose more climate-related information when they register with the agency, rather than propose a rule mandating it, though he gave the caveat that a conservative SEC would likely not be interested in doing so.

Throughout Gensler’s tenure, the SEC has often received criticism for what many viewed as fast-paced rule-making and overreaching rules, though sources said they think things will change for the better.

“The rule-making from the past four years has been overwhelming in number and scope, and … I can’t imagine any SEC chair will ever approach it in the same way in terms of just bombarding the regulated industries,” Elovitz said.

“I hope that these four years were kind of a blip on the radar — that we can go back to normalcy and go back to taking a data-driven approach,” said Jennifer Han, chief counsel at MFA, a trade association for the global alternative asset management industry.

In a Nov. 18 letter, the Investment Company Institute, a trade association representing regulated investment funds, asked Gensler to suspend compliance dates for certain agency rules and halt its work on rules not yet finalized, given the new administration will likely bring changes to SEC leadership. The trade association contended that “new leadership at the commission should have the opportunity to evaluate the administrative record and determine next steps.”

Elovitz said he doesn’t see the SEC shying away from its rule-making agenda or becoming less active overall, but the commission will likely differ in what issues it focuses on going forward.

However, the Institute for Portfolio Alternatives’ Coverman said she thinks that the pace of rules “will significantly slow down,” and there will be a “very significant pause,” with a likely re-evaluation of the commission’s positions on crypto, artificial intelligence and more.

Sources agreed that crypto is one of the areas most likely to see a change, with Elovitz stating that he is “very hopeful that digital assets and … financial technology, more broadly, will be more widely reviewed, accepted (and) promoted by the SEC.”

While the crypto industry has often been critical of what they call a “regulation by enforcement approach” from the SEC, Gensler defended the agency’s crypto approach in a speech Nov. 14.

“Those parties offering or selling securities to the public need to register and give proper disclosure to the public,” Gensler said, adding that crypto intermediaries — including broker-dealers, exchanges and clearinghouses — need to register with the agency as well.

“It’s not because I say, it’s because Congress has said; it’s because president after president said; it’s because courts have said it; it’s the law of the land,” he contended.

Also on Nov. 14, a group of 18 Republican attorneys general filed a lawsuit against the SEC, contending that the agency is overstepping its authority by filing enforcement actions against the crypto industry.

Elovitz said an SEC approach “that focuses on enforcement, to the exclusion of opportunities and investments, I think, hopefully, is a thing of the past.”

In a new SEC, “we’ll probably see a director of enforcement who would be extremely sympathetic to the claims of (the crypto) industry,” Columbia Law School’s Coffee said, noting that the SEC’s director of enforcement is not a position that requires congressional approval.

The position that most are interested in is that of the new chair, which requires a nomination from the president as well as Senate approval.

According to sources, it’s common practice that when a new administration comes in — which typically results in the SEC chair stepping down— that the new president then appoints an acting chair of the commission to serve under a temporary basis.

Likely picks for the acting chair are Republican Commissioners Hester Peirce and Mark Uyeda, sources said, who have both publicly criticized the agency under Gensler’s leadership.

Names being floated for the official chair pick include Uyeda, former SEC Commissioner Paul Atkins, former Commodity Futures Trading Commission chair Heath Tarbert, Robinhood Markets legal chief Dan Gallagher, and law firm partners Richard Farley, Norm Champ and Robert Stebbins, according to Bloomberg.

While things may be different a second time around, Elovitz pointed to the SEC under former Chair Jay Clayton, who former President Trump nominated during his first administration. He said the agency saw “shifts in priorities” under Clayton, but one didn’t see “a wholesale change to the organization.”