What's Next for the SEC?

Missed our webinar? Watch the video recording and read the transcript.

The following is a recording and transcript of the webinar, “What’s Next for the SEC” held on December 19, 2024. Former SEC Deputy General Counsel Andrew Vollmer and former SEC Commissioner Joseph Grundfest discuss controversies such as the climate-change disclosure rules, shareholder proposal and proxy adviser rules, and crypto enforcement and regulation.

Jessica Paska: Alright. Welcome. Thank you everybody for coming. I'm Jessica Paska at the Mercatus Center at George Mason University.

Today, we're gonna talk about the likely priorities of the SEC in the first several years of the second Trump administration.

We'll be talking today with two who have followed the SEC and securities law for a long time, Joseph Grundfest and Andrew Vollmer.

Joe Grundfest, a former Commissioner at the SEC, W. A. Frank Professor of Law and Business at Stanford Law School, Senior Faculty, Rock Center for Corporate Governance, Stanford University.

Joe is a nationally prominent attorney and economist who joined Stanford's faculty after four years as a Commissioner of the SEC. His work had been published in Harvard, Yale, and Stanford Law Review, and he's been named among the nation's one hundred most influential attorneys. He also has considerable real world experience. For more than thirteen years, he chaired the audit committee at KKR, one of the world's largest publicly traded private equity firms, and with Bill Sharp, the 1990 Nobel Laureate in economics, cofounded Financial Engines, the world's first financially successful robo advisor.

He also provides counsel on litigation matters often involving the SEC.

Andrew Vollmer is a scholar with the Mercatus Center. He was Deputy General Counsel at the SEC, taught securities law for several years at the University of Virginia School of Law, and was a partner in the securities enforcement group of Wilmer, Cutler, Pickering, Hale, and Dorr LLP.

So today, we'll talk about a few topics and then take questions from the audience. So if you have a question, feel free to put it in the Q&A below.

First, we're gonna talk about the commission, now has five members led by Gary Gensler. How will that change in the first year of the Trump administration?

Then we'll talk about what the commission will do with the climate change disclosure rules being challenged in the Eighth circuit.

After that, we'll go through some of the rules that have been controversial during the past few administrations, like the shareholder proposal and proxy advisor rules.

We'll follow that with crypto, both as a matter of enforcement and regulation.

We'll talk about what a new commission will do with the enforcement program.

And then lastly, we'll ask our speakers: With a new commission with a deregulatory bent. Will they attempt to adopt any major new regulations?

So let's get started. If — we know the makeup of the commission in the period after the inauguration, we're expecting Trump's plan to nominate Paul Atkins as the chair.

So Joe or Andy, whoever wants the first question, can you tell us about how the commission is likely to be different?

Joe: Andy, why don't you kick it off?

Andy: Alright.

So let me talk about, where we are at the moment, with the commission. Obviously, the composition of the commission is very important to our thoughts about what might happen in the next few years. So at the moment, there are three commissioners aligned with the Democrats, two aligned with Republicans.

The Democratic commissioners are chair Gary Gensler, commissioners Carolyn Crenshaw, and Jamie Lizarraga.

Two of the Democratic commissioners have already said publicly that they plan to resign shortly before the inauguration. So the chair, Gary Gensler, has said he will resign on January twentieth, and, Commissioner Lizarraga has said he's going to resign a couple days earlier.

The term of the third Democrat, Commissioner Crenshaw, has expired, but she's permitted to stay on for a while through the end of 2025 unless her successor is confirmed before that.

And, she was renominated by Biden, but the senate yesterday refused to advance her renomination.

So it's possible Trump could renominate her, but Trump could, and we'll get to I think Joe can do this.

Joe: Let's handicap this. I mean, a lot of the opposition to Crenshaw arises because of her position on crypto related situations. We know the influence the crypto community has on the Trump administration, and one of their top asks is basically change the SEC's approach to crypto.

From that perspective, don't you think that the institutionally smart move for the Trump administration would be to nominate Atkins to fill Crenshaw's seat, alright, so that that gives Atkins the longest possible runway and also deep six's Crenshaw?

Andy: I-I completely agree that Trump ought to nominate Atkins for the Crenshaw spot because it deals with her holdover period and gives Atkins the longest time period. So for the audience, if you don't know, there are staggered five year terms, and they all kick in at a different year.

So, my only reservation about that is politics is hugely important here, and the practice has been for a Republican president to take a lot, allow heavy influence from the senate Democrats on filling Democratic seats on the SEC.

Joe: Yes.

Andy: Now Trump's a bit iconoclastic.

I don't know. I mean, he did this before. In his first term, he did allow the Democratic senators to essentially pick Democratic commissioners, but I don't know what Trump will do this time. And it's possible that Schumer would want Crenshaw to be, renominated, but you're quite right.

Crypto is a big issue for the, at least we think, for the Trump new Trump administration, and Trump may not be willing to go along with that. So it's — go ahead, Joe.

Joe: I think the calculus is actually a little bit more interesting, and the chess game is gonna be played out in other levels. First, the democrats are also gonna care about what the crypto people think about, and you have to understand that the ZIP code that I live in, we're full of crypto people here in Silicon Valley.

Again, I'm I'm speaking to you from the heart of Silicon Valley, and my neighbors are Democrats that care about crypto and Republicans that care about crypto and Democrats that voted for Republicans because they care about crypto. So, that that that's just a reality in this situation.

The second thing that we need to think about is clock management.

It's not just who gets nominated, but it's also when and how does that happen and what are the incentives to delay and accelerate.

Currently, Andy, we're gonna have three members of the commission as of January 20.

And the rule at the commission is that when you have three members, it takes three members to pass anything. You need unanimity in order to have a quorum.

So the question, Andy, is Crenshaw is gonna be on with Uyeda and Peirce.

Suppose a matter comes up and Crenshaw just decides she's not gonna show up. Doesn't that mean she has a veto?

Andy: So I disagree with just one little point, and that is, yes. So come January 20th, there will be three commissioners.

I wanna add, Trump is highly likely — well — will appoint an acting chair. Yes. Either Peirce or Uyeda.

Yes. As you said, the quorum is three.

So if you've got three, four, or five com-commissioners, quorum is three.

So if she doesn't show up to a meeting or they there's a thing called seriatim where you can do it by writing.

You're exactly right. There's no quorum.

But you said that there had to be unanimity. Maybe you meant to show up, but not on the vote. If she shows up to a meeting, it's a majority vote.

Joe: But she does have a de facto veto by ‘if I don't show up, we don't have a quorum, and therefore, you can't act.’

Andy: That's correct.

That would be irresponsible, but, yes, — it — she could do it.

Joe: Right. So here's the reality.

Until you have a new commissioner so that you wind up getting to either a commission where it's all three Republicans or you have four commissioners, Crenshaw has a veto.

From the Democrats' perspective, the longer Crenshaw has a veto, the better off the democrats are.

So from that perspective, they may want to delay the Gensler nomination, and that may give them some leverage to say, well, okay, to the extent that they can delay. They don't control the senate.

But whatever they can do to delay and to stretch that out gives Democrats leverage, and that arguably is something they can use to say, let's form a package deal, and we get two Democratic commissioners on, and here's who they are.

But on the other hand, the the way I describe it is democratic commissioners in the upcoming legislation, in the upcoming administration, will be very much like traffic lights in Naples, Italy.

You know why that is? You know you know why they have traffic lights in Naples?

Purely decorative purposes.

Okay? Nobody pays attention. I've driven in Naples. Okay? Nobody pays attention to the traffic lights. They're not even suggestive. They're merely decorative.

Democratic commissioners in the upcoming administration, the SEC, will be there for decorative purposes.

These are gonna be we've had three to two votes during the Gensler administration where the Democrats are the three and the Republicans are the two. It's now gonna be flipped, and it's totally different from the environment in which I served on the SEC. And now we're going to the way back machine where we Democrats and Republicans would get into a room and we'd say “look we want unanimity on the rule. None of us are gonna get everything we want. If we can come out with the rule that gives all of us seventy, eighty percent of what we want and we all hold hands and we all say kumbaya and that's what's best for the market.” That's what we would usually do.

But that mindset is now gone.

Alright? It's nostalgia. It's not reality.

And we've just been through a period of three to two votes with the Democrats dominating. We're now heading into a period of three to two votes with the Republicans dominating.

The Republicans were decorative under the Gensler regime. Now we're gonna wind up having the Democrats being decorative under the, Atkins regime. I think that's a huge loss on both sides, but that's the reality.

Andy: So I think that there are human and political pressures that would stop Crenshaw from not show — just saying I'm not gonna show up.

It's very it would be a very short term strategy. And although she could block formal commission votes for that, call it, two months, I-I'm not sure that's long enough for her to desire to do that. She would also be blocking a lot of enforcement cases, by the way.

Joe: Well, she can she can —

Andy: I'm sorry. Just let me finish the last point. So so I'm not sure it's short term is the first. And second, there will be the natural counter pressure of if ‘I do that to them, they can do that to me the next time.’ And that hasn't had heavyweight in recent years on in the in-on-in congress or in the agencies, but it does have some force.

And maybe Crenshaw will be paying a little bit of attention to that. Sorry. Go ahead.

Joe: Yeah. No. The current environment, the environment we're heading into, I think, really has no effective precedent.

And if what we simply wanna do is articulate the different strategic moves that are available to different parties in this environment, the idea of basically being a no show and thereby delaying, certain actions because they they will event evidently eventually take place. Alright? You know, Crenshaw cannot stop this forever, but she can delay and defer and deny for as long as possible.

There may be strategic value for her doing that. And I think people just need to recognize that strategy is available.

When we're down to a commission of three, Crenshaw has a de facto veto.

Andy: Yep. Well, I agree with that. And I-if she employed it strategically, maybe there are things that she could stop, but it's only short term. In the end, as Joe said, and just to be plain about this, once the system works through, even if Schumer delays things, even if Crenshaw tries to delay things, there will be a five person commission with three Republicans and two Democrats.

And as Joe said, there will be a majority of Republicans.

And by the way, they've worked very closely together. I think most people know this by now, but both Hester Peirce and Mark Uyeda were counsel to Paul Atkins when Atkins was commissioner before. So they all know each other very well.

Joe: Yeah. And the way I would describe it, you'll have three Republicans and two decorative Democrats.

Jessica: And if a commissioner refuses to show up, can they be removed by the president? Would a two person commission be regulatory active?

Andy: Yeah. You can have a two person commission. It's happened in the past. And, yes, the president may fire an SEC commissioner, may remove an SEC commissioner for any reason or no reason.

So that's exactly right.

Joe: Andy, is what you just said controversial? Would there be litigation over your last statement?

Andy: I don't know. I know that's commonly believed. Even you, Joe, I think, believe that the presidents must have cause to fire an SEC commissioner, but the law is overwhelmingly against that.

Joe: All I'll say is if Crenshaw gets fired without cause, you and I both agree there will be litigation over that question.

Andy: I-I-I would probably agree with that, yes. Right. And But but that's just you know, these are doomsday scenarios, and Joe's right to identify them because stranger things have happened.

But I do not anticipate some of these extreme —

Joe: Is the government gonna shut down tomorrow? Yeah. Well Okay. I mean, look. You know, you have to understand.

Jessica: Alright. Well, let's let's move on to the climate change disclosure rules.

Andy, do you wanna give us a quick background, and then, we'll go to Joe to tell us what he thinks the commission's options are.

Andy: Right. So I think this one's interesting, and I'll be interested to hear Joe's thoughts about it. So the background, again, sorry for many of you who know all this.

But, March 2024, the SEC adopted detailed extensive special disclosure rules about climate change for companies that sell securities to the public or who are publicly reporting.

Now the rules say a company must provide the public with information about material effects of climate change risks, and some companies have to disclose greenhouse gas emissions.

The two Republican commissioners at the time did not support the climate change disclosure rules, but the SEC adopted them.

States and private parties immediately challenged the SEC rules, asserting that — that these are the the main arguments:

The climate change disclosure rules exceed the agency's statutory authority. They violate the first amendment, and they're unlawful under the Administrative Procedure Act.

Nine cases were filed. They were consolidated and are pending in the eighth circuit.

I filed a an amicus brief supporting the argument that the SEC did not have statutory authority.

So you know my point of view on that.

The Gensler Commission stayed the rules during the litigation.

So that's, and oral argument has not been held yet, and so we need to have oral argument, and then the eighth circuit will have to issue a decision.

Jessica: And, Joe, what do you think, Republican control at SEC will do about these rules?

Joe: Well, I'm gonna take a step back. These rules are dead, dead, dead. Okay? The only question is how they're gonna be killed.

Alright? Will they be strangled? Will they be shot? Will they be immolated? It's or will they be strangled, shot, and immolated?

Alright? But the rules are dead. And the commission, in my view, made a profound mistake in the direction that it took here.

And there's an interesting split in the community. You've got a group primarily of, you know, scholars and academics that say the SEC has the authority. You've got another group of scholars and people from industry who say the SEC does not have the authority. Alright?

I think the better reading of the statute is the SEC does not have the authority to adopt all of the rules, especially the rules that required quantitative measurement scope one, scope two, or scope three.

Andy: A greenhouse gas emission.

Joe: Oh greenhouse gases. Okay? And and I'm I'm sort of as as best as I can, I'm kind of like a coalition of one in this space where I think additional information about this is important. Investors need it. There's a way to fashion the information so that it's consistent with what the statute requires, but what the commission did was not that, was dramatically different.

And, you know, I've got two long comment letters in where I said to the commission, ‘look, you don't have authority to do it the way you're doing it. Alright? We can get into the details.’ I come out the same place that Andy does on the authority issue, but with different logic. K? But we agree.

What they did? No, that that will not pass muster. Not a chance it passes muster in the fifth circuit given the recent decision on the Nasdaq diversity rules.

Andy: What the commission the eighth eighth circuit eighth circuit, Joe.

Joe: Yeah. No. It's it yeah. But given the fifth circuit's recent decision on the Nasdaq diversity rules, which is very similar to Andy Vollmer's interpretation, right, of the statute, there's no way that the commission is going to be upheld if the eighth adopts the Fifth Circuit's interpretation of statutory authority. We agree on that. Now what's interesting is there there was a way for the Gensler Commission to move forward, but it made the mistake of overreaching.

And the Gensler Commission did that again and again and again.

It tried to do too much. It went beyond the statutory remit.

And instead of adopting more modest regulation that would be maybe sixty, seventy percent of it what it wanted and having that approved by the court, it's got nothing again and again and again. Alright? It's it's just been greedy and overreaching and not understanding the limits of the statutory delegation.

Now what it could and should have done very simply is said ‘look, the EU is gonna have all of these tremendous requirements on disclosure. There are gonna be other disclosure requirements.

Investors rationally want to be able to understand the information that's already out there in the most efficient way possible. So we're gonna have a rule, and the rule simply says, ‘to the extent that you're disclosing this information anyway, aggregate it up. We're gonna give you a safe harbor for any reasonable form of aggregation and report it. Alright?

And that way, the additional reporting costs to you are close to zero. Alright? Because you don't have to measure anything that you're not already measuring and reporting under EU rules and other rules, and they require global disclosures. And it's scope one, scope two, and scope three.’

And I also would have supported a litigation safe harbor where you report this stuff. The SEC can sue you. The DOJ can sue you if there's fraud, but no private litigation for the reporting of these these quantitative disclosure measures.

That would have been well within the SEC's authority, I believe. And it crossed the line by saying, we, as the Securities and Exchange Commission, have authority to require you to do measurements of scope one, scope two, or scope three. The EPA might have that authority, but the SEC does not.

Andy: So what do you think— you say the rules are dead. How do we get there?

Well, that's another interesting question. Right? And it becomes so number one, the first thing that's gonna happen is even the Gensler Commission said we're not gonna enforce this. Alright, you know, pending the result.

Clearly, the Atkins commission is going to say we're not gonna enforce this. And then the interesting issue is, do they ask for a stay while they figure out how to unravel it through the administrative process, or do they just say, we're gonna dismiss this. We wanna dismiss this. Alright. And then what do they do with the administrative process? And there, it becomes fascinating because if you look at what the Gensler Commission did to try to unwrap the proxy rules, we've got a split in the circuits.

What does the SEC need to do in order to be able to undo a prior rule?

Andy: Yeah. These are the proxy adviser rules.

Joe: The proxy adviser rules. That's exactly right. And we have a split between the fifth and the sixth. Alright? The fifth circuit said you need to show more in order to undo the rules.

The six said: No. It's fine. You've shown enough.

And now what we have is irony.

The Republicans, when Gensler was in charge, wanted to make it hard to undo what Clayton did.

Now that the that the Republicans are in charge, the Republicans are gonna want to make it easy to undo what Gensler did.

So what we have is a flip flop, which is entirely predictable.

We also have a circuit split, which could lead to Supreme Court litigation.

And the issue, and it's really authentically a fascinating intellectual question, is what does an agency need to show in order to be able to change position?

Does it need to show some change in underlying fact, for example, or is it sufficient to say the facts haven't changed? It's just the policy preferences of the administration that's changed.

The Trump administration will want to argue the latter.

We don't need to show changes in underlying facts. We just have a different value system, and therefore, we can change.

And it'll really be fascinating to see where the Supreme Court comes out on that issue as an interpretation of the APA.

Andy: So great. That was terrific. I, I agree that is a possible route for the new commission, and that is to go through a rule making procedure the way they did on the proxy adviser — the way the Gensler people went — did on the proxy adviser rules, do a new notice and comment process to repeal the climate change disclosure rules, and that is an option available to the commission.

I would want the commission to consider another possibility.

So, Joe, I'd be interested in your thoughts on this.

You mentioned that the SEC might dismiss the case before the eighth circuit. Now they cannot do that because they're not the petitioners.

They're the respondents. So, essentially, they're the defendant.

But what the SEC could do, at least I-I'm gonna offer this as a hype-hypothesis, is for the commissioners to vote to tell the court that the SEC no longer intends to defend the rules.

And to reduce the risk of a legal challenge well, there will be a legal challenge no matter what happens. But to reduce the legal risks, I think that should be a commission vote and not just a chairman's decision.

Now, I-I think a decision no longer to defend the rules would likely allow the court to rule in favor of the petitioners and vacate the rules.

So you would not have to go through notice and comment — a notice and comment process.

This is a little complicated because there's a group of states that have intervened on the SEC's side.

Joe: To say you can't —

Andy: Right. So, well, what do you do with them? I don't — I don't know whether the court would allow the intervening states to continue to defend the rule. They might. They might.

But where I come out in, ultimately, as in a practical sense is that if the SEC notified the court that there's there's merit to the petitioner's position and we no longer defend the rules, that will carry a lot of weight with the eighth circuit even if the states continue to try to defend the rules.

Joe: Yeah. So I could imagine the SEC basically saying, ‘look. We're gonna have a new process. We're gonna get rid of these rules, and here's how we're gonna get rid of these rules. Alright. Number one, our interpretation of the statute is different than the prior commissions.’

And what you're gonna argue is a change in circumstance because you now have the fifth circuit's opinion in the Nasdaq case, which if you add that to people's understanding of what the scope of the law is, you can easily say, we don't have authority to do large parts of what's in there simply by statutory interpretation.

Now given the fact that supreme court has given gotten rid of deference to the agencies in Chevron through Loper Bright, alright, you can argue who the hell cares about that? It's up to the courts. But, no, there still is space for agencies to say this is how we understand the statutory delegation.

Second and very important, I'll just say that the SEC's cost benefit analysis in that case wasn't done as well as it might have been done.

So you can avoid a lot of stuff by simply saying: Look, we're gonna redo the cost benefit analysis.

That will lead to a very significant change in terms of the facts upon which the agency previously relied. And the easiest change in facts path that would say: look, not only is there a change in policy, but there's a change in facts would be one that is more realistic about the costs that these rules impose on registrants and the relative benefits given the fact that much of this information is gonna be out there anyway.

And, you know, I would know how to write the rule in an afternoon, saying: ‘look, give me give me the data. We have new facts. The cost benefit ratio is nowhere near as good as the commission thought that it was, and therefore, we're getting rid of it for that reason, and the statute doesn't allow us to do that.’

Andy: So that's also part of what the commission could do. My concern about that is it would take much longer to get another cost benefit analysis run.

It maybe they wouldn't need to ask the public for additional factual information. Maybe the facts as produced during the first notice and comments process are enough, but it would still take a a long time to write a new cost benefit analysis.

Joe: Let me let me suggest that you always want to be procedurally cautious and careful when you're dealing with the APA.

You wanna dot every i. You wanna cross every t.

I think the optimal path forward basically says, look. ‘We're reopening this question. We wanna take comments on a variety of things, especially cost benefit analysis.

The data that we need,’ — the data the agency needs is pretty much already out there. The industry has generated it. It's just that the commission has squinted at the numbers, alright, in order to help support the conclusion that it wanted to reach.

Well, if you open both eyes broadly, you can see things differently.

You can invite more information.

You can reassess the costs. You can reassess the benefits. And during the interim, you tell everybody we're delaying. We're deferring.

And the marginal cost of doing that, given the work that everybody's already done, is relatively low.

Andy: So Yeah. Maybe. So I hear you. I'm worried about the dedication of the resources to that to an issue that the new commission wants to clean up.

But I agree with you. Weight on the scale to procedural protections.

Much greater chance of courts buying whatever the the commission ultimately decides to do. Those are all factors that need to be weighed up. And I think the quantity of resources that would have to be dedicated within the agency, the amount of time that it would take, those are factors to be looked at too. And if they just tried to say we're not gonna defend, there's an additional potential outlay that is the SEC could be liable for legal costs, attorney's fees under the equal access to justice act.

Probably not a big risk, might not be a huge amount of money, maybe could get a waiver from the petitioners, but it's just that's another factor to look at.

I do think in the end, these rules are not going anywhere, and they're going to be found, I think— I think they will be repealed, Joe. I don't think that they will be modified.

Joe: So, And and and, you know, look, even though my policy view, which has no weight right now, is that there is a way to get this information out there that is inoffensive to the industry, very helpful to investors. I'm focusing on investors, qua investors. And if you add a litigation safe harbor, the industry would like that. The industry would want that.

So it's got an upside to the investors. It's got an upside to the industry, but that that's not my prediction. The simplest thing for the Atkins Commission to do is simply to just get rid of these rules and to say our philosophy is materiality based to the extent that climate issues are material with regard to 303 and other disclosures. We already called for them. We don't need separate rules for artificial intelligence, for climate, for cybersecurity.

It's covered by 303 and all of the others. So all of the other kind of, like, segment specific philosophical disclosures, here's AI stuff. Here's climate stuff. That will probably be all kiboshed by the Atkins Commission.

Andy: Yep. And I agree with I agree with all that you said. And I do think it's a reasonable approach to consider what — and just I just wanna lay it out plainly for our listeners — the commission could ask the court to maintain this or to impose a stay in the litigation while it considers what to do. And they would the the commission would continue to stay its enforcement of the rules, ask the court to stay the litigation, and then they could, in fact, take some time to do some of the more elaborate procedural steps that we've been talking about. So I-I think that that's a a feasible and possible approach to this.

Jessica: Okay. Thank you. Moving on to another area of SEC regulation, and I will note we have some good questions, that I-I promise we'll get to at the end from the audience. But I just wanted to ask, another area that's been criticized. Joe, I understand that you believe the shareholder proposal rules could be ready for review by an Atkins commission. Is that correct?

Joe: So what's interesting with the with the share with the proxy rules and the whole bit, you could imagine death by a thousand cuts, alright, where, you know, we look at how you handle the proxy advisers. You know, you look at how many, you know, shares do you have to hold for how long, what's admissible subject matter. Yeah. Yeah. Yeah. Yeah. Yeah.

My prediction here is that the Atkins Commission will sooner rather than later go big on this issue.

And they'll ask the fundamental question: Why are there federal proxy access rules at all? Isn't this a question that can be addressed on a company-by-company basis under state law?

If a company, in its charter and bylaws, wants to create its own rules for stockholder access, God bless them. Let them do that. Alright? And, you know, as long as there's no fraud or what have you, there's no role for the federal government in that.

I wouldn't be surprised if the SEC says ‘look we're going to start a rulemaking. And the first question is, why don't we get rid of these rules altogether? Why can't we rely on state law and on private ordering to address all of these questions just like questions about should a board be staggered, or not? How many members should there be on a board? All sorts of other fundamental questions are done under state law with private ordering. Why should this be any different?’

And I wouldn't be surprised if the conclusion they reach is it shouldn't. We're getting out of the the 14a-8 business altogether. We repeal 14a-8. Now subsets of that inquiry will say, well, ‘gee how should we change our rules with regard to proxy advisers? How should we change if we keep — if we keep — the proxy rules? How should we change the rules with regard to how many shares you need to own for how long? How should we change?’ Those will all be subquestions, but the initial question will be existential: Why do we have these rules at all? Let's get out of this business.

Andy: Yeah. I think that's great, and, I think there could well be some momentum for that with Paul Atkins and and a Republican commission. But that prompts, a question, Jessica, if I can sort of jump in on this point. Joe, you've had some thoughts about whether the Trump administration, the new Trump administration, could increase OMB or OIRA oversight of the SEC. Do you wanna talk about that, mention that or explain that?

Joe: These aren't my thoughts. I'm just repeating other people's thoughts.

So Project 2025, Russell Vaughn (sic) was in charge of that. K? And he is now nominated to run OMB. So when I look at Project 2025 and see anything that relates to OMB, I take it super seriously because it's the new guy in charge of OMB explaining how he thinks OMB should operate. Well, you read the sections of [Project] 2025 that relate to OMB. It's entirely clear. Anything that the SEC wants to do in terms of regulation is gonna have to be run through the Office of Management and Budget and/or OIRA, and it's gonna have to get approval, alright, from Ross Vaughan and the OMB and the West Wing before it moves forward.

Now as a practical matter, that probably doesn't make a huge difference here because Atkins' agenda is gonna be very aligned with Vaughn's agenda and the West Wing's agenda.

And this issue would arise only if Atkins wants to do something that the administration doesn't want him to do, low probability event, alright, or Atkins doesn't want to do something that the administration wants him to do. That's more interesting and more difficult.

The biggest issue here, and it's one that people are treating like a third rail and they're very scared to discuss, is what relationship will the West Wing have with the enforcement division and enforcement decisions of the SEC.

We know that the president has publicly said that he's gonna expect that the justice department prosecute people criminally for various reasons, and we can talk about the legitimacy of that, the series of but we know that he said it.

Logical question: If the White House thinks they can get the justice department to prosecute people criminally, why does the White House think that it can't get the SEC, especially under strong interpretations — the unitary executive doctrine — to sue some people for securities fraud? And very controversially not to sue other people even if the staff has concerns that there's a violation. Let me take a breath there.

Andy: No. All I can do is, agree that that there's certainly prospects of that.

Joe: And and look and and, again, this is what I, in in conversation, describe as the ‘Musk mess’.

Alright? And this is not a hypothetical. This is a fact. We know that the SEC is investigating Elon Musk for additional disclosure violations. I have no idea as to the merits of those claims. All I know is what I read in the newspapers, and I know enough not to believe everything that I read in the newspapers.

We also know from Alex Spira's letter and the whole bit that Musk thinks that this is all politically motivated. Alright? What will the current commission do about this investigation?

We we know based on the correspondence, the staff has given a deadline. You and I know how this works.

Let's assume Musk doesn't respond. Well, they're gonna do an action memo to the commission. Right, Andy?

Andy: And it's probably half draft--drafted already.

Joe: It's probably already drafted. It then goes right to the current commission, and the question is: Does the current commission vote — by interesting question —What will the vote be to institute proceedings against Elon Musk before it switches from a Democratic commission to Republican commission?

Woah.

And if that vote comes up, will the vote be three to two? Will the two Republican commissioners say, ‘no. You shouldn't sue Elon?’ Alright. Will they come out and issue a I mean, this is a mess.

Andy: Alright? I agree completely.

Joe: Which is why I call it the Musk mess. And if they decide not to proceed, alright, in a situation where they would proceed against someone else and they don't proceed here because it's Musk, what does that say to the enforcement division?

On the other hand, it's entirely possible the commission looks at this and says you don't have a good case.

Okay? Then how are they going to persuade people of that rather than it was a politically motivated decision?

This is a mess.

Andy: Agreed. I-I do think we ought to move to a new topic, Jessica, if you agree.

Jessica: I wanna jump right into crypto assets. Been getting a lot of attention. Can you guys talk a little bit about likely changes in the crypto area from an Atkins commission?

Andy: Do you wanna go first, Joe?

Joe: No. Andy, you you you hit it.

Andy: Well, I'll let me give an overview, and then Joe will fill in with some details.

Not all crypto assets are securities. The SEC's approach has applied the definition of a security far too broadly.

And what I and I'm nearly certain that there's a majority on the new Republican commission that would agree with that. So the SEC should develop a rule or guidance to exclude certain types of crypto from the securities laws.

Now some of them do legitimately qualify as securities, and they should — the Commission should develop a feasible alternative regulatory approach to allow people to come in and register the crypto for sales and distributions or allow crypto exchanges to be registered. So that's as a regulatory matter.

On the enforcement side, I think that there should be a significant narrowing of enforcement efforts in the crypto area. It should be restricted to those cases where the crypto asset is well within an accepted definition of a security, and there's been a deliberate material misstatement in the distribution.

And I think the SEC should give a lot of thought to dismissing some of the pending enforcement cases in the crypto area. Again, there's this equal access to justice act cost issue, but I don't think that should drive decisions.

And the only other thing I wanna say, but maybe Joe we can add details if Joe doesn't get to it is the much preferred approach in my view is some legislation. And there are — the house passed a bill. The senate has a bill. Maybe the senate has two bills. There's one on stablecoins, I think. There ought to be some basic fundamental regulatory principles put in place and with an assignment of enforcement power to an agency of some sort. I would prefer that it not be the SEC because I think the SEC is just too entrenched in its view of the disclosure securities regulatory system that's been in existence for so many decades.

I think the CFTC is a plausible alternative, but I would not wanna see shared jurisdiction, because that's a mess. So, those are my top thoughts.

Joe: So Andy and I agree. Everything's a mess. Okay. Now let me let me divide my views here with the question about how—how the SEC is gonna proceed with the existing enforcement agenda and—the force—the forthcoming enforcement agenda and then on the legislative and regulatory front. K. So a couple of predictions on the enforcement agenda: There'll be a two step filter.

First, if there are allegations, if the complaint, if the ongoing legislation does not involve fraud, it's either gonna be stayed or dismissed.

And the cases that will continue, first step, it has to have a fraud allegation in it.

The stuff that has no fraud allegation, it'll be stayed or dismissed pending what happens in the legislative environment. I think that'll be part of the story there. K?

Then even if there is a fraud allegation, you apply the next step. Is the underlying instrument adequately described as a security? Andy’s correct. The SEC has, I think, been overly aggressive in its definition of security.

So you can actually have cases where there are legitimate claims of fraud, but the underlying instrument is not best described as a security, these people should be punished for fraud.

They should perhaps go to jail for fraud, but not under the federal securities laws. Maybe under the commodities exchange act, maybe under the wire act. Nothing excuses fraud.

Alright?

But the issue is, is it securities fraud? What flavor of fraud is it?

And very important to respect those distinctions and to honor the statutory litigation, the commission's gonna be much more careful.

It will simultaneously ask, is this a security under a tighter definition of what a security is, and is there fraud that's going on? And if there is no fraud and if it's not a security, we're gonna sort of take either we're either we're gonna take a pass on this, or let's see what the new legislation says, and then we'll decide how to proceed.

Now new legislation, very tough.

Again, it's a mess.

The issues that need to be addressed are authentically difficult, and many of them have no obvious answers. They're gonna be compromises. We're gonna make mistakes, and that's gonna be tough.

So first, whatever the new legislation is, it's gotta have anti fraud components.

Even the strongest crypto proponents agree that there's a lot of fraud that goes on in this market. Between the rug pulls and the lying and the people say the code runs this way and it doesn't run that way. There's no shortage of lying that goes on in this market, and there's no excuse for fraud. So first, whatever the legislation is, it's gotta have an effective anti fraud component.

Second, national security threats in this space are real. Alright?

North Korea is having a great time in this market. Alright? Lots of nation states are doing very well in crypto in ways that we have to be able to counter.

And the difficult technological issue here is that much of crypto is really built on anonymity.

Alright? That we can use crypto and we can anonymize all sorts of transactions and thereby evade lots of sanctions and continue to synthesize banking and other transactions through crypto. How do we address that? How do we effectively have anti-money laundering, Know Your Customer rules, and the like that work in crypto space. No good answer there. We're gonna have to figure something out. It'll be imperfect, but we're gonna have to make that work. Other issue, federal securities laws and many other laws are are are geo-specific. Right? They operate within the jurisdiction of the United States. Crypto is geo agnostic.

How do we do the equivalent of geolocation if we're going to have the equivalent of a geo-specific form of enforcement in this space. Again, very, very difficult.

No perfect answers. We're gonna come up with a kludge where we have the best possible kludge.

Last observation. We're gonna need a level playing field. You have stock in General Motors. Alright? No doubt that's a security subject to all sorts of securities laws. You got a money market fund. No doubt it's a security, all sorts of rules about what has to back it, the whole bit.

Well, you have a stablecoin. The stablecoin is functionally identical to the money market fund. Why, if at all, should it be subject to different rules simply because it's traded in a tokenized form rather than in the traditional form? Tough question.

You’ve gotta share a General Motors stock. I can tokenize General Motors stock. Why should tokenized General Motors stock be any different from underlying stock? Tough issues. Utility tokens, investment tokens, tough issue, but easier to solve than many of the other questions that I just did. Here are the rules.

If you you can set up up certain safe harbor saying if you meet these conditions, you're presumptively a utility token. You're not subject to SEC regulations. Other regulations might apply.

You can have another situation where you're presumptively a security, and then you could have a middle zone where it's facts and circumstances that everybody will want to avoid because nobody wants in good faith to litigate facts and circumstances. Let me take a breath there and say, again, to go back to the theme that Andy and I are hitting on, it's a mess.

Andy: So those those are great, points, Joe.

And so I just wanna add a-a couple sort of cleanup thoughts here, which are, first, I think some momentum has been building for legislation. There are many difficult issues.

Maybe there's been a bit of a turn. As I said, there's already the house passed one bill. The senate's been pretty serious about some other things, and maybe the election has moved the momentum a little bit more towards legislation.

My only other thought is although achieving legislation is extraordinarily difficult in our country, Congress would be better off starting out slowly and simply, not trying to answer all the possible questions.

Anti-fraud rules are critical here because the markets are rife with problems.

Very important to deal with that. But what sort is is the right regulatory approach, and what are the definitions, and whether there should be Know Your Customer rules, whether we're gonna try to make this into, currency transfer set of regulations. They congress needs to start slowly, and let's get some experience. That that's what I would add to that.

Jessica: Well, I will ask one last question before we move on to audience questions.

Looking at the new commission with the majority of Republicans, there's a chance they will not be inclined to impose major new regulations. But are there any areas you think the commission will want to address?

Andy: Joe, do you wanna go first?

Joe: Yeah. I-I think they're gonna initially spend a lot of their time getting rid of existing regulations, trying to clean up regulations, you know, doing things like asking, ‘should we get rid of 14a-8?’, trying to simplify Regulation S-K, I think their initial approach will be less is more.

And, I-I don't see them I-I see them with a set of rulemakings designed to get rid of old rulemakings rather than rulemakings to say, ‘oh, here are a couple of new rules we need’. And the only the only rules where they might add stuff would be to address crypto. That I-I think that's the agenda.

Andy: No. I agree with that. I think that the Republican dominated commission with Paul Atkins as chairman is gonna be very reluctant to embark on some new set of rules to govern parts of the securities markets.

And I agree, Joe, that much of the effort is more likely to be devoted to reforming areas of the securities laws to make them less costly, less inefficient, less burdensome. So we've talked about some. You talked about shareholder proposals, proxy advisers, crypto.

And you just mentioned — and I wanna underline this because I agree — I think a major effort to reduce the detailed disclosures required in Regulation S-K should be undertaken, and it would be a major improvement to the securities laws overall.

And I think I'm just this will be a bold statement, but a project could have the goal of cutting Regulation S-K in half.

And I think you could do it.

Joe: Oh, we know Elon Musk could do it.

Andy: Here's another idea I had. Not sure they'll get to it, but this would, this would be quite important at the SEC, and that is to develop and adopt a rule on rulemaking. So use the notice and comment system to adopt a rule that sets out the steps the SEC must follow to propose and adopt a substantive legislative rule. Because if you look back at the last three and a half years and the Gensler Commission, they have not been following good practices in their procedures for adopting these hugely important, disruptive, and costly sets of rules.

Don’t — listen — don't get me started on how, forgive me, technically inept the SEC has been under the Gensler regime.

There there are terrific people on the staff who are fully aware that they've been instructed to engage in suboptimal approaches.

Alright? I -I-I-I am not gonna throw the staff under the bus on this. I think the mistakes are primarily not at the staff level. They're upstairs with the commissioners. The the the the commissioners have forced the staff to go under some directions that the smart people on the staff knew were doomed, and they had to salute. They had to say, okay, chairman Gensler. This is what you want. I'll do the best that I can, but this is not gonna work.

So before we turn to the audience — so thank you, Joe, for that. I did wanna first thank Jessica for organizing this. This was her idea, and I so I hope everybody's enjoyed it. And I wanna thank you, Joe, for agreeing to participate.

Joe: My pleasure.

I brought out my samurai warrior for the occasion.

Jessica: Alright. Jumping back over to an audience question, back from our first topic. When we were talking about the commissioners, must there be two democratic commissioners? Or, this would be uncharted, but could there be members of other parties or no party at all?

Andy: The statute says that no more than three commissioners may be from the same political party. So yes. And there have — there's a history of appointing so called independents. So Jay Clayton was an independent. Mary Shapiro claimed to be an independent. I mean, that that's sometimes just not true. But the rule is only that three commissioners may not come from the same political party. So people affiliated with other political parties are certainly able to be appointed.

Joe: And the other observation is there's no requirement that you have two Democrats and three Republicans. You could technically just have three Republicans and not fill the two decorative seats. It's not been it's not been done, but a strict reading of the statutory text does not prohibit it.

Andy: Yeah. That would probably get litigated at some point.

Joe: But you know, if it got litigated, I would, you know, which side I would be on on that.

Jessica: Next question. Could the commission re-propose, this is talking about environmental disclosure rules. Could they re-propose the rules with an eye towards making the rule vulnerable to a congressional review act?

Andy: Well so I've — that's an interesting possibility. The difficulty with it is that their the commission has adopted and reached a final conclusion about the the currently existing climate change disclosure rules. So you have to deal — and those are the ones that are being challenged in the eighth circuit. So I have some trouble figuring out how you get a re-proposed or a a newly adopted set of climate change disclosure rules set up for the Congressional Review Act without dealing, in some way, with the current rules. Now if—if the proposal is what Joe and I have already been talking about, he's so we've talked about a notice in comment process to repeal the climate change disclosure rules.

That would be a final decision of the agency, and I don't know the all the ins and outs of the Congressional Review Act. So but that final decision maybe would be subject to the Congressional Review Act, but, or an alternative that Joe talked about is a modified set of climate change disclosure rules.

It would have to repeal the existing ones and or modify them in some significant way, and then that would be open to challenge under the Congressional Review Act. So the it-it's not an impossibility, but my main point is you've got to grapple with the currently adopted set of rules.

Joe: I agree with Andy. You gotta grapple with the currently adopted set of rules and setting things up so that congress it's more complicated than you need. There's simpler solutions to the problem.

Andy: Yeah. I agree with that too.

Jessica: Okay. And then unless, more questions come in, this will be the last one. I wanted to ask you guys about, SEC enforcement, about the idea of a commission, an independent advisory committee to review the policy and procedures of the enforcement program. Could you talk a little bit about that?

Andy: Yeah. I'm a big fan of that idea.

That's a good opportunity for me to mention if people do not know already. So Paul Atkins has a lot of interest in the enforcement program. He had a lot of interest in it when he was a commissioner and had various very strong views. And he put a lot of his ideas — I mean, so he cares about fairness to defendants or the people being investigated. He cares about the effect of corporate penalties on shareholders. He cares about using enforcement cases to set standards of behavior rather than rules.

He's got a a pretty long list of things he cares about, and he put a lot of his ideas in a law review article, and so I encour — if you don't know about this law review article, I encourage you to take a look at it. It's called “Evaluating the Mission”. It's in volume thirteen of the Fordham Journal of Corporate and Financial Law. It's from 2008, so I encourage people to look at that.

One of the things he mentions is an advisory committee to look at, and evaluate the policies and procedures of the enforcement program. They are such a a committee, or advisory panel is long overdue.

Most people will probably know about the 1972 effort when, a-a-a lawyer, a New York lawyer named John Wells, was named the head of a committee, which became known as the Wells Committee, and they issued a bunch of recommendations, a very long list. The one that's very famous is the Wells submission, so giving objects of investigations an opportunity to put a writing into the staff and to the commission explaining why an enforcement case should not be brought. That's all came out of the Wells Committee, and that was, the model that Paul Atkins had in mind when he mentioned it. But I'm a big fan of this. I would like to see lots of members of the SEC defense bar on the committee, but also plenty of of, members who have experience at the SEC in the enforcement division. But there's much to be improved, which, you know, is a separate discussion.

Joe: Look. I agree entirely. I-I think that the group that is formed needs to have a broader constituency. You clearly need people with lots of experience defending against the SEC. You need people with experience being inside the SEC bringing these cases.

You should also and this will surprise people: Have have people from the plaintiff's class action securities bar. Alright? Because not every case that they bring is a stupid, dumb, bad case. They bring many bad cases, but they also bring some good cases. And trying to get appropriate information and the like from that constituency into the process, right, is also, I think, valuable and constructive.

The SEC enforcement manual needs to be redone. Attorney client privilege, they need to think of the extent to which responsibility needs to be placed on individuals rather than organizations.

I can go down a whole list of very specific items where — you know — if it ever made sense before, it doesn't make sense now, and we can do better.

Jessica: Well, that's all the questions that we have today. Unless you guys have any final thoughts we didn't get to, we can go ahead and wrap up.

Anything else to add from either of you?

No. Just my thanks to everybody again, Joe. Anything more?

No. Thank you for the invitation. Thank you for the opportunity for an intelligent conversation on this topic.

Intelligent conversation is hard to find these days, and and, again, I'm grateful in the extreme.

Andy: And thanks, Jessica.

Jessica: No. Thank you guys so much. We appreciate it. If you wanna get in touch further with, Joe or Andy, email the Mercatus Center, and we'll get you connected. Thanks for tuning in. The video will be available for sharing. Thanks again.