The Impact of a Second Trump Presidency on SEC Enforcement Priorities

Every new presidential administration brings change to federal agencies like the SEC, but the second Trump administration may produce even greater shifts, reflecting the starkly different regulatory philosophies of current Chairman Gary Gensler and his putative successor, Paul Atkins. Enforcement priorities also may shift due to the SEC's recent litigation setbacks and a more skeptical judiciary. One anticipated change is the inevitable pullback by an agency that arguably wandered beyond its statutory mandate.

Renewed Focus on "Main Street" Investors

If history is a guide, the incoming administration is likely to prioritize enforcement issues that affect "Main Street" retail investors. For example, during the first Trump administration, under Chair Jay Clayton, the SEC enacted Regulation Best Interest ("Regulation BI"), which heightened broker-dealer duties when making investment recommendations to retail customers. In the second administration, the SEC may follow a similar investor-protection path, scrutinizing broker-dealer and investment adviser account-type recommendations, rollover recommendations from employer retirement plans, fees and markups charged to retail accounts, and revenue-sharing arrangements. For retail-facing investment advisers, conflicts of interest and marketing materials may receive close attention, while retail-facing broker-dealers may see greater use of Regulation BI. Further, while insider trading, offering frauds, accounting frauds, Ponzi schemes, and foreign bribery are likely to remain enforcement priorities, the civil penalties required to settle those charges may decrease. 

Cybersecurity Enforcement Likely to Continue to Evolve

Republican commissioners have criticized the SEC's recent enforcement actions against victims of cybersecurity attacks, opining that they are based on little more than hindsight and immaterial details. These commissioners prefer an approach to disclosures that, if adopted, may reduce cybersecurity enforcement. Likewise, the SEC's recent efforts to bring cybersecurity controls within the regulations governing internal accounting controls also may subside, given pushback from Republican commissioners and the court's rejection of the theory in SEC v. SolarWinds. Nonetheless, cybersecurity disclosures have been an SEC enforcement focus, and how the SEC's 2023 Cybersecurity Rules will be interpreted is unsettled. Issuers should carefully review their cybersecurity disclosures for compliance with these regulations, which require disclosure of material cybersecurity incidents and annual descriptions of cybersecurity risks and risk management and oversight processes.

Enforcement as a Last Resort Rather Than the First

The agency also may move away from what some have characterized as an "enforcement-first" approach toward a model that provides more upfront guidance. Commissioner Peirce in particular has criticized the SEC's use of broad enforcement sweeps against numerous defendants, reasoning the SEC's rules must be unclear if so many market participants make the same mistakes. Moving forward, the SEC may leverage its examinations and policy divisions to identify areas of widespread noncompliance and then issue rules and guidance to effect change.

Shifting Priorities Away From Crypto, ESG, and "Broken Windows"

SEC enforcement in the cryptocurrency market has spawned vocal dissatisfaction from the crypto industry, members of Congress, and other regulators. Given this industry's apparent clout in the new administration and the announcement of a new AI and crypto czar, the SEC's self-appointed role as primary crypto regulator seems likely to end.  

The SEC's ESG initiatives are also likely to fade. Proposed but unadopted rules will likely be abandoned, and SEC defenses to challenged rules (such as the climate risk disclosure rule) may be dropped. That said, enforcement over misleading disclosures about ESG-related issues—e.g., "greenwashing" and, more specifically, climate-related targets—probably will continue. Issuers should continue to carefully review their climate and other ESG-related disclosures. 

Lastly, the Gensler-led SEC has generated billions in financial sanctions by charging companies with compliance and controls shortcomings without any allegations of fraud or investor harm. For instance, since December 2021, the SEC charged more than 100 financial firms with failures to retain employees' electronic communications on "off-channel" applications. The SEC also has charged a number of issuers with internal controls violations over supposedly faulty disclosures, without alleging that those disclosures were materially misleading. These (and similar) cases harken back to the agency's much-criticized "broken windows" initiative, which prioritized enforcement of technical and procedural rules to incentivize greater compliance. This initiative was largely abandoned during the first Trump administration and seems likely to suffer the same fate again.

Corporate Financial Sanctions Are Likely to Fall 

Under Chair Gensler, corporate penalties and disgorgement reached record highs. But Republican commissioners have long criticized the SEC's high corporate penalties, arguing that disproportionately large settlements drive out legitimate market participants and punish the wrong parties (usually the shareholders). A Republican-controlled SEC will likely favor smaller penalties and adhere tightly to disgorgement limitations set by the Supreme Court in Liu v. SEC. Likewise, companies that undertake proactive remediation may receive more cooperation credit.