What to Expect From the SEC Under Biden

With the announcement that Securities and Exchange Commission Chair Jay Clayton will be stepping down before year's end, attention has turned to what changes may be afoot for the SEC under a Biden administration.

The first thing to note is what won't change with a new administration and new SEC chair.

In any given year, the SEC's Enforcement Division brings between 700 and 900 new actions, and those new cases fall into a bell curve that doesn't shift dramatically from year to year or administration to administration.

That is, the SEC would have brought the vast majority of any year's cases (those in the middle of the bell curve) regardless of who was in the White House or who was chair of the SEC. When I was in the Enforcement Division during the transition to the George W. Bush administration from the Bill Clinton administration — from having Arthur Levitt as SEC chair to having Harvey Pitt — no one told me to put my pencil down on any of my cases.

It's the outlier cases, which are few in number, at the edges of the bell curve where the change is most pronounced.

The most notable change at the SEC, of course, will be the "tone at the top."

So, for example, Chair Mary Jo White's "broken windows" philosophy stressed enforcement action even for minor transgressions, reflecting her background as a criminal prosecutor.

By contrast, Clayton's emphasis on increasing market access to "Main Street" investors reflected his background and priorities.

Expect the Biden administration SEC chair to be more in the vein of White, with many expecting another former U.S. attorney such as Preet Bharara to be considered for the post.

In practical terms, the change in SEC chair will result in some obvious differences from the current SEC agenda. For all market participants, expect to see a shift from principles-based reporting requirements, i.e., a requirement to disclose all material information whatever it may be, to a more prescriptive approach under which certain specific topics are required to be disclosed, such as environmental, social and governance (ESG) issues, human capital resources, conflict minerals and others.

Regulation Best Interest Seesaw

Investment advisors and brokers can also expect the Regulation Best Interest seesaw to tilt back toward imposing a fiduciary standard on brokers whether through new rulemaking, enforcement actions that push the envelope on the current Reg BI standard, guidance from the staff, or all three.

Private equity and hedge fund managers should expect a return to the kind of scrutiny applied to their sector during the second term of the Obama administration.

A cluster of cases in 2015 and 2016 saw the SEC allege fraud in connection with fund documents such as private placement memoranda, limited partnership agreements and Forms ADV on a host of topics including allocation of transaction fees and other expenses, accelerated monitoring fees, broken deal expenses and the like. Those types of cases didn't disappear during the Clayton SEC, but they moved to the edges of the bell curve and will likely return to the center.

The number of insider trading cases dipped during the SEC's fiscal 2019 and 2020, continuing a downward trend that began in the Obama administration.

This may be a reflection of market conditions, the formidably opaque judge-made law on the subject and the particular cases under investigation at any given time, rather than an unwillingness to bring insider trading enforcement actions, which tend to get support on a bipartisan basis.

What will be more interesting to watch than the total number of insider trading cases is the SEC's willingness to pursue investment advisors and others for failing to prevent insider trading as it did in an October 2016 case.

In that case, the SEC alleged a violation of Section 203(e)(6) and 204A of the Advisers Act and required the advisor to pay $8.8 million in disgorgement and penalties for not appropriately supervising a research analyst or questioning him about the source of his information despite purported "red flags," not asking the chief operating officer to look into the matter, and not having and enforcing policies to track and monitor the analyst's interactions with employees of public companies.

We saw a few similar cases during Clayton's term as SEC chair, but we should expect more going forward.

As we move into 2021, we can expect much of the SEC's business to carry on as usual. But at the margins, expect more aggressive and more frequent enforcement on a host of issues that were at the top of the SEC's agenda in 2015 and 2016.