On Wednesday, November 6, 2024, major media outlets announced Donald J. Trump as the winner of the 2024 U.S. presidential election.  This alert discusses the potential impact of Mr. Trump’s election on the U.S. Securities and Exchange Commission (the “SEC”) and the regulation of asset managers more generally.

I. The SEC under President Trump

Likely New SEC Chair – and, Perhaps, New IM Division Director

The most immediate effect of an upcoming second Trump administration relates to the tenure of SEC Chair Gary Gensler.  Chair Gensler was appointed to his position by President Biden early in his term and was ultimately confirmed to a five-year term through 2026 in April 2021.  As a longtime Democratic appointee, it is unlikely that Chair Gensler will stay on following the inauguration of President Trump – it has been longstanding practice for SEC Chairs to resign in advance of the transition of power (e.g., Chair Gensler’s predecessor, Jay Clayton, left the SEC in December 2020 ahead of the January 2021 inauguration of President Biden despite having been confirmed to a term running through June 2021).

To the extent Chair Gensler looks to stay through his term notwithstanding the election results, there would likely be deadlock on the more contentious rulemakings at the SEC until a new Republican Commissioner has been sworn into office.  President Trump, who has promised to “fire” Chair Gensler on “day one,” would have the immediate authority to name a new Acting SEC Chair among the existing five Commissioners and presumably would name one of the current Republican SEC Commissioners as Chair to begin to implement a different regulatory approach at the agency.  Whether the President can remove an existing Commissioner from service before the end of that Commissioner’s term is untested and could lead to litigation.  However, given the likelihood that Chair Gensler steps down ahead of the January 2025 inauguration of President Trump, consistent with the actions of his predecessors, this alert assumes that the President will appoint and the Senate will confirm a new Chair in 2025.

The election and inauguration of President Trump is perhaps less likely to immediately affect the leadership in the staff of the SEC’s Division of Investment Management (the “IM Division”).  Historically, such positions do not have the election-related turnover applicable to SEC Chairs.  As such, it is possible that, for example, IM Division Director Natasha Greiner remains in her position under an Acting Chair into 2025 (although, per below, the naming of a new SEC Chair resulting from President Trump’s election is highly likely to change the regulatory focus of the IM Division).

The SEC During President Trump’s First Term

The first Trump administration may provide insight into the regulatory focus and approach to come in a second Trump administration.  Under the leadership of Chair Clayton and IM Division Director Dalia Blass (who served as IM Division Director from August 2017 to January 2021), the IM Division finalized more than 70 regulatory initiatives affecting investment companies and investment advisers.  These changes include, among others:

• Investment Company Act of 1940 (“1940 Act”) rules 2a-5 (relating to fair valuation of assets by investment companies), 6c-11 (relating to the operation of certain exchange-traded funds without the need for an exemptive application), 12d1-4 (rules relating to registered “funds of funds”), and 18f-4 (relating to the use of derivatives and other senior securities by registered investment companies)
• Reforms of the marketing rule under the Investment Advisers Act of 1940 (the “Advisers Act”)
• Rules relating to securities offering reforms for business development companies (“BDCs”)
• Rules relating to the provision of proxy advice (some of which were later rescinded or invalidated through litigation)
• Adoption of Regulation Best Interest and promulgation of the SEC’s interpretation of the fiduciary duty owed by an investment adviser to its clients under Section 206 of the Advisers Act

A Second Trump Term – What Rulemakings and Guidance May Come

Many of the items finalized under Chairman Clayton and Director Blass were intended to modernize or streamline the regulatory framework in a manner that was, on the whole, relatively deregulatory in nature.  It seems likely that approach would continue under a new Chair appointed by President Trump and, potentially, a new IM Division Director hired by that Chair.

Concretely, this new approach means that there are likely to be immediate changes in what is reflected on the SEC’s agenda of rulemaking actions published biannually pursuant to the Regulatory Flexibility Agenda (the “Reg Flex Agenda”).  For example, rulemaking items on the current Reg Flex Agenda[1] from the IM Division that may be likely to be removed include “Enhanced Disclosures by Certain Investment Advisers and Investment Companies about Environmental, Social, and Governance Investment Practices,” certain private market reforms (the rulemakings relating to “Regulation D and Form D Improvements” as well as “Revisions to Definition of Securities Held of Record”), the controversial security-based swap large position reporting proposed rule (“Position Reporting of Security-Based Swap Positions”), and the reproposal of “Open-End Fund Liquidity Risk Management Programs.”  It is possible, however, that some existing IM Division rulemakings may be adopted or reproposed in the new administration, if perhaps in different form than originally proposed—e.g., it is possible that the “Cybersecurity Risk Management for Investment Advisers, Registered Investment Companies, and Business Development Companies” and the “Safeguarding Advisory Client Assets”[2] rulemakings may be adopted in some alternative form during a second Trump administration, as each involve longstanding IM Division priorities that preceded the Biden administration.

Possible Regulatory Developments at the SEC – Registered Funds

New items affecting asset managers are likely to appear on the SEC’s Reg Flex Agenda and may be adopted in the coming years by the SEC (or be approved by the staff of the IM Division pursuant to delegated authority from the SEC).  For registered funds, this may include the wide approval of “ETF share classes” of existing registered mutual funds,[3] expanded electronic delivery of shareholder materials, changes to exchange rules to eliminate the annual shareholder meeting requirement applicable to listed registered closed-end funds and BDCs,[4] modernization of the 1940 Act’s in-person voting requirements in light of the experience registered funds and their boards have had with relief provided because of COVID-19, modernization of 1940 Act rule 17a-7, and/or expansion of “co-investment” relief to open-end funds.  Furthermore, it is possible that the Chief Counsel’s Office in the IM Division (“IM CCO”) may be more forthcoming in terms of regulatory guidance regarding recently adopted rulemakings (e.g., the names rule amendments) as compared to recent years.

Possible Regulatory Developments at the SEC – Advisers to Private Funds

As compared to Chair Gensler’s tenure, and in light of the Fifth Circuit’s decision in National Association of Private Fund Managers et al. v. SEC striking down the SEC’s private fund adviser rulemaking, it seems likely that the second Trump administration would provide a period of welcome relative regulatory forbearance for private fund managers.  In particular, as noted above, it seems likely that any rules adopted relating to the safeguarding of assets would be updated to reflect concerns addressed by commenters to the original proposal.  It is also likely that the rulemaking relating to “Conflicts of Interest Associated with the Use of Predictive Data Analytics by Broker Dealers and Investment Advisers” is unlikely to be adopted in a form similar to its original proposal, and the rulemaking may not be reproposed at all (as was indicated on the most recent Reg Flex Agenda).

In terms of affirmative regulatory developments affecting private fund managers, it is possible that the IM Division provides regulatory relief or relaxes previously held positions that would facilitate the development of products that extend private fund managers’ strategies to retail investors.  For example, the IM Division may revisit its informal staff position that securities issued by a closed-end fund that invests more than 15% of its assets in private funds can be sold only to accredited investors.[5]  In addition, it is possible that IM CCO may be more forthcoming in terms of regulatory guidance regarding recently adopted rulemakings (e.g., amendments to the Advisers Act marketing rule) as compared to recent years.

Possible Regulatory Developments at the SEC – Digital Assets

It seems likely that issuers of digital assets—and asset managers interested in investing in digital assets on behalf of their clients—will face a friendlier SEC than under Chair Gensler.  President Trump has spoken in front of various crypto groups and has promised to make the U.S. the “world capital of crypto.”  In addition, the two current Republican Commissioners have criticized the SEC’s approach to digital asset regulation and enforcement under Chair Gensler.  It is possible that the SEC could even go so far as to set up a novel regulatory framework for digital assets, perhaps working alongside the Commodity Futures Trading Commission,[6] as envisioned by the Financial Innovation and Technology for the 21^st Century Act,[7] a 200-page bill that passed out of the House in May 2024 with some bipartisan support.

Even to the extent that a wholesale regulatory framework for digital assets is not developed, it seems relatively likely that the SEC and other financial regulators will work toward a regulatory framework for stablecoins.  It is possible that this process would be accelerated and/or mandated by legislation, as bipartisan legislation has been drafted in both the House and Senate[8] and could pass out of Congress and be signed into law during the post-election “lame duck” Congress or early in the second Trump administration.  It is also quite possible—perhaps likely—that the SEC under a new Chair appointed by President Trump would reconsider Staff Accounting Bulletin No. 121 (“SAB 121”), an accounting standard that requires certain entities involved in crypto custody activities to record digital assets as liabilities on their balance sheets.[9]

SEC Enforcement in a Second Trump Administration

A new Chair in a second Trump administration will appoint a new Director of the Division of Enforcement at the SEC.  This new leadership will likely bring some changes in prioritization, both in terms of process and substance of the actions.  These changes may begin soon after the transition, as a newly named Acting Division Director could choose not to recommend for a Commission vote certain negotiated settlements that the prior administration would have recommended.

Once a newly confirmed full Chair and new Division Director are in place, it is likely that there will be different priorities for the Division.  For example, the Republican Commissioners have noted in a dissenting statement that they have begun to object to the penalties and undertakings in recent off-channel communications cases, noting that the SEC has failed to give firms “an achievable path to compliance” and urged a reconsideration of the SEC’s enforcement approach to the issue.[10]  Based on that and similar statements on other topics from the Republican Commissioners, as well as past historical practice of the SEC under Republican-led Commissions, asset managers can expect an overall less aggressive posture in terms of both proposed penalties and the use of novel legal theories by the Division of Enforcement.

A new SEC Chair and Director of Enforcement might also implement procedural changes that may have substantial impact over time.  For example, different SEC Chairs and Directors of Enforcement have taken varied approaches to the procedural authority delegated outside the Division’s front office to Enforcement Division staff (both within headquarters and in the regions) around how and when Wells meetings are granted, the process around initiating investigations, and what level of senior staff is required to approve and/or attend settlement negotiations.  While these procedural changes do not typically necessarily have a partisan salience, changes in procedure are generally made with underlying ultimate effects in mind, and certainly can affect how potential litigants experience the enforcement process.  SEC registrants should therefore pay attention to developments in this area.

With that said, it is likely that many of the aforementioned potential enforcement-related changes could take some time to become apparent.  The staff of the Division of Enforcement are already working through various cases, and much of the Division’s priorities do not generally have the partisan salience perhaps more appropriately ascribed to rulemaking priorities—e.g., cases involving insider trading, financial frauds, offering frauds, and other straightforward violations of SEC rules have been brought by the SEC under both Republican and Democratic administrations.  That is to say, there are many matters in the SEC’s enforcement pipeline that are ultimately unlikely to be significantly affected by the new Trump administration.

II. Other Policy Considerations Affecting Asset Managers

DOL – Preservation of the ESG Rule

Finalized in late 2022, the ESG Rule provides that fiduciaries to ERISA plans (and asset managers designing funds for plans to invest in) should base investment decisions on factors that the fiduciary reasonably determines are relevant to a risk and return analysis.  The rule clarifies that ESG factors can be part of those investment decisions, but they should generally be treated like any other economic factor.  The ESG Rule reversed the more stringent, ESG-skeptical standard adopted during the first Trump administration and reinstated the DOL’s historically neutral posture on specific investments and the relevant considerations that impact such decision-making.

The ESG Rule has been the subject of attack on a number of fronts since its adoption two years ago.  Republican members of Congress have introduced multiple resolutions under the Congressional Review Act to withdraw the ESG Rule, and the DOL has been sued in federal court by plaintiffs seeking to invalidate the ESG Rule, including attorneys general from 26 states in a suit filed in Texas.  The district court granted the DOL’s motion for summary judgment last year, and after review by the Fifth Circuit, the case has been remanded back to the district court for further consideration now that the Supreme Court’s decision in Loper Bright Enterprises v. Raimondo overturned the longstanding Chevron deference doctrine for agency interpretations.

We would expect the Trump administration to stop defending the ESG Rule in the Texas litigation and/or to rewrite or amend the rule to make it more challenging for ERISA plans to invest in products that consider ESG factors.  If a rewrite occurs, the DOL may be emboldened to bring back the more stringent version of the rules that it initially proposed in 2020 (which expressed a clear skepticism that ESG factors could ever qualify as pecuniary in nature)—variations of which some red states have enacted over the last few years in the governmental plan context.  Any new rule is likely to present challenges for plan sponsors and the asset management industry.

DOL – Implementation of the Fiduciary Rule

The Fiduciary Rule, which the DOL approved on April 23, 2024, replaces the five-part test the agency adopted in 1975, and provides that a broader array of persons will qualify as investment advice fiduciaries under ERISA.  The 2024 rule is focused on protecting retail investors including 401(k) participants and IRA owners. As part of the same regulatory initiative, the DOL also amended various class prohibited transaction exemptions (“PTEs”) applicable to investment advice fiduciaries (including, PTE 2020-02, PTE 84-24 and others).

The Fiduciary Rule was scheduled to take effect on September 23, 2024; however, in July, two Texas district courts separately ordered stays delaying the effective date until further order by the courts.  As with the ESG Rule, the Fiduciary Rule has encountered fervent opposition since its adoption from members of Congress as well as private litigants.  In May, trade groups from the insurance and financial services industries sued the DOL in two separate lawsuits in Texas.

The second Trump administration will likely stop defending the Fiduciary Rule and amendments to the exemptions in the courts.  Should the trade groups win, the DOL will likely not appeal, thus ensuring the 2024 regulatory package gets unwound.  In the aftermath of such a scenario, the Trump-led DOL will likely seek to reinstate the five-part test for determining who qualifies as an investment advice fiduciary under ERISA.  In addition, we expect that changes to the standards for fiduciary advice like rollover recommendations would be rolled back.

DOL – QPAM Amendments: Maintenance of the Status Quo

The QPAM Exemption (PTE 84-14) is generally considered the gold standard when seeking relief from ERISA’s prohibited transaction rules.

In early April, the DOL adopted amendments to the QPAM Exemption that increase the size thresholds to be a QPAM, clarify and expand the list of acts that trigger disqualification, clarify the role of the QPAM in overseeing transactions, and impose new notification and recordkeeping conditions.

While the amendments did not engender unanimous support from the financial services industry, there also have not been any legal or legislative challenges as of this time.  This is unsurprising, since the DOL has plenary authority to grant administrative prohibited transaction exemptions on an individual or class basis under ERISA Section 408(a) and Code Section 4975(c)(2).  In other words, in adopting the amendments to PTE 84-14, the DOL acted within its authority, which has been granted by Congress, to set the terms and conditions for obtaining exemptive relief.

Notwithstanding the Trump Administration’s anticipated deregulatory agenda for the DOL and other federal agencies, we expect that the QPAM amendments will remain in effect. At the end of President Trump’s first term, the DOL’s Office of the Solicitor had issued an information letter to the Securities Industry and Financial Markets Association in which it stated that it would not view a conviction under non-U.S. law as a disqualifying event for purposes of QPAM eligibility.  It seems unlikely that the DOL will look to restore that position or otherwise undo the new conditions imposed by the QPAM amendments.  If anything, it is possible that the DOL will dial back enforcement efforts in this area and/or be more permissive to financial institutions applying for individual relief from the disqualification provisions of Section I(g) of the exemption.

Potential Changes in Government Operations

President Trump has proposed potentially significant changes to the operations of the federal government that, if implemented, may affect agencies regulating asset managers.

First, President Trump has suggested creating a “government efficiency” commission tasked with conducting a financial and performance audit of the federal government more broadly.  What this commission can and would do in the absence of new legislation from Congress—and how it would affect the regulation of asset managers—is to be determined.

Second, it is likely that President Trump will reinstate in some form his October 2020 executive order removing civil service protections for those “policy-determining, policy-making, or policy-advocating positions” in the federal government—the so-called “Schedule F” executive order.  The original Schedule F order was never finalized and was rescinded by President Biden upon taking office.  It is unclear which, if any, employees at the SEC would be subject to the new order.  If, however, a substantial majority of SEC staff are deemed to be subject to Schedule F, it could mean that the SEC will be more likely to reflect a particular president’s agenda—and, thus, may be viewed as increasingly politicized.  The extent to which this affects the regulation of asset managers remains to be seen.

ENDNOTES

[1] The SEC’s current Reg Flex Agenda is available here.

[2] The proposed safeguarding rule included a number of problematic provisions that were flagged by commenters during the public comment process.  Please see Ropes & Gray’s comment letters here and here for more information.

[3] Previous Ropes & Gray alerts on various ETF share class-related applications available here, here, here, and here include additional observations related to proposed ETF share class relief.

[4] A Ropes & Gray alert discussing the New York Stock Exchange LLC’s application proposing amendments to exempt listed funds from holding an annual shareholder meeting is available here.

[5] A Ropes & Gray whitepaper that discusses the regulatory obstacles and opportunities relating to retail investments in private funds, including a discussion of this informal IM Division staff position, is available here.

[6] Outside of the digital asset context, the implications of the election of President Trump and a likely new Chair of the CFTC are less obvious than those changes that are likely at the SEC.

[7] H.R. 4763 (2023).

[8] See Clarity for Payment Stablecoins Act (H.R. 4766; S. 4155).

[9] SAB 121 was subject to a Congressional Review Act repeal resolution passed by both houses of the U.S. Congress that was ultimately vetoed by President Biden.

[10] Statement of the Hon. Hester M. Peirce and the Hon. Mark T. Uyeda, “A Catalyst: Statement on Qatalyst Partners LP” (Sept. 24, 2024).

This post come to us from Ropes & Gray LLP. It is based on the firm’s memorandum, “A Second Trump Administration: Implications for Asset Managers,” dated November 6, 2024, and available here.