Corporate America now has a big chance to roll back regulations. Securities and Exchange Commission Chairman Gary Gensler has sought to dramatically increase regulation of corporate America, vastly increasing disclosure requirements in particular. In response, corporate America has brought an avalanche of lawsuits against Gensler and the SEC. With a new regime now coming into the SEC following Donald Trump’s victory in the presidential race, how will they respond to the lawsuits? What will the new leadership at the SEC look like? CNBC spoke with Larry Tabb, director of market structure research at Bloomberg Intelligence. The questions have been edited for brevity and clarity. With the election over, what will happen to the leadership of the SEC? Gary Gensler’s chairmanship does not expire until 2026, but it’s likely he will step down as chairman. However, Gensler also remains as a commissioner. There is currently three Democrats and two Republicans, but that will likely flip under the Trump administration. Could Gensler stay on as a commissioner? It would be odd, but he could do it. But he would become a regular commissioner, and not only lose control of the agency’s agenda but the majority of its people. He would have one vote and a few advisors. Are there are any favorites for SEC chairman? Dan Gallagher, now serving as Robinhood’s chief legal officer and formerly a Republican SEC commissioner, has been floated as a possible replacement. Another possibility is one of the current Republican SEC commissioners, Hester Peirce, who has opposed most of the new rulemakings and lawsuits that Gensler has initiated. However, Peirce is an academic who has shown little political ambition and it’s unclear if she would even want the job. The other Republican commissioner is Mark Uyeda who has been at the SEC a while, and he may be a choice for either acting chair or chairman. What happens to Gary Gensler’s current agenda? There are dozens of pending rules that have yet to be adopted. The incoming chairman controls the staff and the agenda. Gensler’s agenda will be put on hold. Gensler still has a majority on the SEC. Is it possible he will try to push through additional rules before he leaves? It’s possible, but even here there are limits to what he might be able to do. The Congressional Review Act allows Congress to overturn regulations passed in the last portion of a previous administration. What might be the priorities for the incoming SEC chair? That will depend very much on the incoming chairman. There’s little doubt a Republican-led SEC will be more sympathetic to crypto. Gensler has said he believes most crypto currencies are securities. I think there will be an attempt to more clearly define which crypto currencies are or are not securities, which would go a long way toward clearing up regulatory uncertainty. There will likely be a bigger push for broad legislation in Congress that would give much of the power to regulate crypto to the CFTC. There may also be an effort to reinvigorate the IPO market. Helping companies become public could be a priority, including an effort to eliminate existing rules which impede capital formation and make investing more expensive. What about all the regulations that the SEC passed under Gensler? Could the new administration undo those regulations? They could, but there is a long process that needs to be followed. Essentially, it is the rule-making process in reverse. They would need to propose to undo the rule, post a notice and comment period, and then vote. The SEC is being sued over dozens of regulations Gensler has enacted, including board diversity, share buybacks, short-sale disclosures, securities loan reporting, registration of Treasury market dealers, climate disclosure, and cybersecurity. Many of them allege that the SEC has overstepped its regulatory authority. What will happen to these lawsuits? The SEC is an independent agency but they have great latitude in deciding how to respond to lawsuits. Most of these suits are still pending in federal court. As soon as a new Republican chairman comes in, I suspect many of these lawsuits will probably not be contested and the regulations will not go into effect. How would that work? In a lawsuit, a corporation is suing the SEC, claiming, for example, that they do not have statutory authority to require more disclosure of some part of their business. The SEC has to respond to the lawsuit. One thing the SEC could do is simply decide not to contest the allegations. The court would then say, in effect, ‘Oh so you agree with the suit, you over-reached,’ and the court will not allow the regulation to go into effect. Alternatively, they could tell the court they agree that the rule doesn’t comply and then say they will go and fix it, but in effect do nothing. I am not sure the SEC would want to publicly back away from rules they proposed and voted on. Any rules in particular the incoming administration might be eager to rescind? Climate change, securities finance/ lending, and I am sure there are others. Are there any other reasons to believe rulemaking will be greatly curtailed under the Trump administration? Yes. The Chevron doctrine was established by the Supreme Court in 1984, it granted deference to a government agency’s interpretation of rules, providing they were reasonable. This was overturned this year by the Supreme Court, which held that the Administrative Procedure Act required courts to exercise independent judgement in deciding whether an agency acted within its statutory authority. What is the effect of that ruling? It’s still being worked out, but it will likely reduce the power of federal agencies to make rules and increase the role of courts in interpreting those rules. That said, the SEC has not historically relied on Chevron, so this ruling will probably have little impact, but suing the SEC has become very popular, not only by broker, agencies and exchanges but also by the buyside, which is really aggressive for money managers (or their associations). There is little way to put this genie back in the bottle without changing strategy, so you will continue to see many lawsuits, which has and will undermine the authority of the agency. The only way out of this is two-fold: one, take out a big stick and use enforcement to push back on the industry and/or two, go back to the industry and seek consensus. The industry is of course looking for number two, but it may be a combination of both.
