In this post on the CLS Blue Sky Blog, two leading authorities on securities law, Professors John C. Coffee, Jr. and Joel Seligman, take a crack at prognosticating about SEC regulation—and even the SEC itself—under the next Administration. They contend that, with a new Republican majority on the Commission, including the new Chair, together with Republican majorities in Congress, the SEC will be in a position to “revise a broad range of statutory, rule, and enforcement policies of the Commission.” What’s more, the new Department of Government Efficiency—which they suggest, may not be entirely, um, open-minded when it comes to the SEC—could certainly put a major crimp in the resources available for the SEC’s budget. (They note the irony “that the SEC makes a large profit for the U.S. government, and in fiscal 2024, it obtained a record-high level of fines and sanctions (approximately $8.2 billion). Shrink its budget and you likely shrink that recovery.”) In their view, the SEC is “probably the most successful and effective of the New Deal administrative agencies, one that has helped preserve the integrity of our capitalist system,” but they fear that it may be handicapped in continuing to do so under the next Administration. With that in mind, they pre-announce their intent to “encourage a more informed debate by forming a ‘Shadow SEC,’ composed of acknowledged experts in securities regulation.” Let’s look at some of the potential legislation and rulemaking changes that they speculate might be in store for the SEC and public company disclosure.
With respect to legislation, the authors took their cue from Project 2025, pointing to the possible passage of laws prohibiting requirements that issuers disclose “social, ideological, political, or ‘human capital’ information that is not material to investors’ financial, economic, or pecuniary risks or rewards” (including, for example, the Nasdaq board diversity requirements), or other potential laws to prohibit “efforts to redefine the purpose of business in the name of social justice,” stakeholders, CSR, SRI, ESG or any of the other like-minded acronyms. Other possibilities include specifically blocking the new climate change disclosure rules—no surprise there—or perhaps the SEC would just settle the current litigation on favorable terms. (See this PubCo post.) Potential legislation could also involve repeal of “mandated disclosures relating to conflict minerals, mine safety, resource extraction, and CEO pay ratios.”
Alternatively, in most cases, the SEC could act on its own without any legislation. Here, the authors suggest we might see a number of changes to loosen the private offering requirements, such as expanding the definition of accredited investor or preempting blue sky regulations. They also suggest that the SEC could abolish Rule 144 and other resale restrictions (requiring instead that the issuer provide adequate information to the market) or eliminate “administrative proceedings within the SEC except for stop order proceedings to prevent defective registration statements.” In addition, the SEC could certainly shelve a number of agenda items, such as the proposals for human capital disclosure (see this PubCo post), or rescind other regulations that have been adopted. Here, the authors identify incentive-based compensation (for financial institutions) and predictive analytics. (Perhaps add to the mix the climate disclosure rules and the latest SLB on the Rule 14a-8 seesaw to the list?)
The authors also note that the SEC “can instruct its staff not to pursue specified SEC enforcement matters, including matters already begun under Gensler’s chairmanship.”
The authors make clear that they are not suggesting that the SEC will be abolished entirely, just that it “might be partially dismantled, in effect downsized from a battleship with proven ability at combatting fraud to more of a light cruiser unable to take on many cases.” But, they acknowledge, in a democracy, votes matter, and the majority has won the right to “redirect” the SEC.
In light of their concerns about the potential diminution of the SEC, one step they advocate is the formation of a “Shadow SEC,” composed of acknowledged experts in securities regulation, intended to encourage debate through the presentation of “cogent and factual arguments”: “Such a shadow body—more scholarly than political—might frame issues in fuller detail and offer less drastic alternatives.” Although “[c]larity and objectivity will not always win,” they suggest, “sometimes they might. That is enough to justify the effort.” They plan to more formally announce the panel in a week or two, with the expectation that the panel would address announced proposals with “facts, logic, and objectivity.” “It may be an uphill battle,” they conclude, “but it is worth fighting as the SEC is very much worth saving.”
