The future of the Securities and Exchange Commission (“SEC”) is currently uncertain. Given the Trump election, Republican majorities in both the House and Senate and soon at the SEC, we focus on what may happen next and, even more importantly, on what can be done to resist foolhardy changes.

Many straws are now in the wind.

First, there is the hostility of President-elect Trump and many of his allies in the Republican Party, who have all taken fervent public positions opposing SEC policies, particularly the SEC’s policies on cryptocurrencies and climate change.

Indeed, the Republic Party platform on July 8, 2024 made a specific commitment concerning Crypto: “Republicans will end Democrats’ unlawful and unAmerican Crypto crackdown and oppose the creation of a Central Bank Digital Currency. We will defend the right to mine Bitcoin and ensure every American the right to self-custody of their Digital Assets…”[1]

President-elect Trump’s self-interest here is an open secret. By October 2024, Trump had formed World Liberty Financial, a new crypto venture that has named Trump its “chief crypto advocate.” In November, it was reported that Trump Media & Technology Group had filed an application to form TruthFi, a platform for crypto payments, financial custody services, and trading in cryptocurrency.

The crypto industry showered its support on Trump. Indeed, no interest group is likely to have paid more or probably to have gained more in the 2024 election than crypto entrepreneurs.[2]

Because SEC Chair Gary Gensler has already announced his resignation, President Trump will have on his inauguration the power to nominate a new commissioner and a new chair of the Commission, thereby creating a 3-2 Republican majority. The new SEC combined with Republican majorities in both houses of Congress means that the Trump Administration and the SEC will have the capacity to revise a broad range of statutory, rule, and enforcement policies of the Commission.

Even the incumbent Republican SEC commissioners have joined in the harsh criticism of recent SEC policy. For example, Commissioner Hester Peirce has acidly denounced the Commission for a series of “misguided and overreaching cases.” Fellow Republican Commissioner Michael Uyeda has taken the position that that the SEC has been a “total disaster” because it has failed to provide clear guidance for the industry.

Not only does the SEC appear about to fall into the hands of its critics, but much more is on the table in terms of the resources it will have. The Elon Musk-Vivek Ramaswamy proposed Department of Government Efficiency will seek broad reductions to agency budgets and staff size across the board. Of course, the objectivity of Elon Musk to evaluate federal agencies such as the SEC can be questioned as he was recently forced to pay $20 million in a settlement with the SEC with regard to alleged securities law violations in his acquisition of Twitter (now X).[3] No specific numbers for the SEC’s budget have yet been floated, but Musk has stated that approximately $2 trillion of the federal government’s $6 trillion budget could be eliminated. This seems unrealistic and will require congressional assent, but Trump’s congressional allies seem at least as determined as him. The irony here is 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).[4] Shrink its budget and you likely shrink that recovery.

Project 2025, which is an initiative of a highly ideological think tank that wants to downsize or abolish the “Deep State,” has recommended legislation abolishing the Public Company Accounting Oversight Board (PCAOB) and the Financial Regulatory Authority (FINRA) and merging their functions into the SEC. This would require amendment to the federal securities laws, which may or may not prove feasible. Eliminating these specialized self-regulatory agencies would result in a slower administrative process with less freedom to act and flexibility. Project 2025 also proposed establishment of an independent board or commission to produce a detailed report within 18 months that examines “the degree to which the regulatory functions of various other so-called self-regulatory organizations (SROs) which are no longer self-regulatory in any meaningful sense, should be moved to the SEC.” The SROs then appear to be in the bullseye.

Project 2025, joined by other critics of the SEC, also may seek legislation to:

• Prohibit the SEC from requiring issuer disclosure of social, ideological, political, or “human capital” information that is not material to investors’ financial, economic, or pecuniary risks or rewards. This would include the SEC’s 2021 approval of the Nasdaq rule requiring most Nasdaq-listed companies to each have at least two members of its board who are diverse, including at least one who identifies as female and at least one who identifies as an underrepresented minority or LBGTQ+ individual. Project 2025 sought to “[p]rohibit securities regulators, including SROs, from promulgating rules or taking actions that discriminate, either favorably or unfavorably, on the basis of race, color, religion, sex, or national origin of such individual or group.”
• Block the SEC climate change rule, which Project 2025 claims would “quadruple the costs of becoming a public company” and was characterized as also “particularly problematic.” Enforcement of that rule has been stayed during a court challenge, and another possibility here is that a Trump SEC could settle that case on terms favoring the SEC’s critics.
• Repeal mandated disclosures relating to conflict minerals, mine safety, resource extraction, and CEO pay ratios.
• More broadly, Project 2025 would “oppose efforts to redefine the purpose of business in the name of social justice, corporate social responsibility (CSR), stakeholder theory, environmental, social and governance (ESG) criteria, socially responsible investing (SRI) criteria, diversity, business ethics or common- good capitalism.”
• Project 2025 also has proposed steps to preempt all primary and secondary Regulation A offerings from state Blue Sky law registration and qualification requirements.

Nor is legislation a necessary step. The SEC already has broad powers to amend its existing rules, forms, and regulations without seeking congressional approval. Here is a longer list of potential changes that a newly conservative SEC may adopt:

• Broadening the definition of accredited investor under Regulation D or eliminating the accredited investor restriction entirely.
• Allowing Rule 506 offerings under Regulation D, the most frequently used limited offering transaction exemption, to self- certify accredited investor status.
• Exempting micro-cap offerings from registration requirements, presumably in ways that go beyond the current Rule 504 offerings, which are limited to $10 million in any 12-month period.
• Exempting small and intermittent finders from broker-deal registration requirements and providing a simplified registration process for private-placement brokers.
• Preempting Blue Sky registration, qualification, and continuing reporting requirements for securities traded on national securities exchanges or alternative trading systems.
• Terminating the Consolidated Audit Trail (CAT) program.
• Abolishing Rule 144 and other restrictions on securities resales and instead requiring an issuer that has sold securities to provide sufficient information to the market.
• Eliminating all administrative proceedings within the SEC except for stop order proceedings to prevent defective registration statements. Alternatively, respondents could be permitted to elect whether an adjudication occurs within the SEC’s administrative law courts or within an Article III court.
• Shelving several items on the SEC’s Spring 2024 Regulatory Agenda that are in a pre-rule stage such as those involving greenwashing and human capital disclosure.
• Rescinding or amending other rules, including those concerning incentive-based compensation, safeguards for advisory client assets, and predictive analytics and the Commission’s 2023 Rule on Cybersecurity Risk Management.

In addition, the Commission can instruct its staff not to pursue specified SEC enforcement matters, including matters already begun under Gensler’s chairmanship.

We need to be careful here and make clear that no one is yet proposing the abolition of the SEC. Even if all the foregoing changes came to pass, there would still be an SEC to prosecute large Ponzi schemes and flagrant insider trading conspiracies (although the SEC might lack the resources or staff to discover these conspiracies). On the other hand, topics such as the need for corporations to disclose their toxic emissions or the ease with which money laundering can be accomplished through rapid crypto transactions will cease to be discussed (at least in any detail).

The SEC would remain, but 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. Here, we are reminded of Oliver Wendell Holmes’ poem, in which, he decried the efforts of short-sighted cost cutters to scrap “Old Ironsides”:

“Ay, tear her tattered ensign down!

Long has it waved on high,

And many an eye has danced to see

That banner in the sky;”

Perhaps, we are a bit lyrical here, but we, and many others, view the SEC as probably the most successful and effective of the New Deal administrative agencies, one that has helped preserve the integrity of our capitalist system. Whether it can protect these guardrails under a Trump Administration is in doubt.

But what can be done, given that in a democracy the majority rules, and the SEC is not above the majority’s right to curb and redirect it? In our view, a minimum necessary step is to encourage a more informed debate by forming a “Shadow SEC,” composed of acknowledged experts in securities regulation. It would have no power, other than the force of cogent and factual arguments that it might make. Congress is closely divided, and timely, well formulated appraisals of rash proposals might delay or cause some to fail. Such a shadow body – more scholarly than political – might frame issues in fuller detail and offer less drastic alternatives. No doubt some curbs will still be enacted or adopted, but we fear that some extreme critics do not really know what they are talking about. Clarity and objectivity will not always win, but sometimes they might. That is enough to justify the effort.

Within a week or two, our proposed Shadow SEC will be announced. Stay tuned! This panel plans to take on proposals as they are announced, and our expectation is that major policy changes will soon be proposed that need to be examined carefully.

Yes, it is too early to know how far these proposals will go. But given recent statements by President-elect Trump, existing Republican SEC commissioners, major donors and many in Congress, it is not too early to predict that major changes will be proposed. In evaluating them, facts, logic, and objectivity should play a greater role than they have in the debate so far.

It may be an uphill battle, but it is worth fighting as the SEC is very much worth saving.

ENDNOTES

[1] On July 28, 2024, presidential candidate Donald Trump addressed the Bitcoin Conference in Nashville and stated he intends to create a strategic national Bitcoin stockpile, appoint a Bitcoin and crypto Presidential Advisory Council, and fire SEC Chair Gary Gensler. The Wall Street Journal concluded that “Donald Trump wants to be the crypto president.” Trump explained to the Nashville Conference: “The moment I’m sworn in, the persecution stops and the weaponization ends against your industry.”

[2] Soon after the election, the Blockchain Association, which represents more than 100 industry participants, reported that it had contributed more than $429 million opposing SEC crypto initiatives. The Stand with Crypto Alliance similarly stated that more than 260 pro-crypto House candidates and 18 Senate candidates won their elections.

[3] Donald Trump has made similar settlements with the SEC and paid some $10 million to FinCEN in 2015 to settle “persistent” money laundering violations by his casino. Both Musk and Trump can no doubt afford these penalties, but there also seems little doubt that these penalties make them regard the SEC as a persistent adversary.

[4] See “SEC Announces Enforcement Results for Fiscal 2024” (Press Release, U.S. Securities and Exchange Commission November 22, 2024). This was a record level for the SEC, and the funds so obtained cannot be retained by the SEC but must go basically to reduce the federal debt.

This post comes to us from John C. Coffee, Jr., the Adolf A. Berle Professor of Law and Director of the Center on Corporate Governance at Columbia University Law School, and Joel Seligman, Professor of Law and Dean Emeritus at Washington University School of Law and President Emeritus of the University of Rochester.