Excerpt from Practical Guidance

What To Expect From Biden's Financial Regulation Transition

By Amy Greer and Valerie Mirko
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Law360 (December 18, 2020, 1:46 PM EST) --
Amy Greer
Amy Greer
Valerie Mirko
Valerie Mirko
This article discusses the upcoming change in U.S. presidential administration, including its impact on financial regulation generally and the U.S. Securities and Exchange Commission specifically. This article addresses transition matters and timelines for new leadership as well as the potential impact of President-elect Joe Biden and Vice President-elect Kamala Harris' priorities on the direction of the SEC, with a focus on retail investors, COVID-19, and environmental, social and governance matters.

Immediate Transition Matters

Gary Gensler Leading Agency Review Team for Fed, Banking and Securities Regulators

On Nov. 10, the Biden-Harris team announced several agency review teams, including the Federal Reserve, banking and securities regulators team led by Gary Gensler. This team is charged with reviewing the following agencies: the SEC, the Commodity Futures Trading Commission, the Federal Deposit Insurance Corp., the Federal Reserve, and the National Credit Union Administration.

The choice of Gensler, as well as the range of perspectives represented on the 15-person team, indicates the potential for a forward-looking approach to the review, driven by both academic and labor-oriented points of view.

Gensler comes to the position with significant past experience, having served as chair of the CFTC, a partner at The Goldman Sachs Group Inc., the U.S. Department of the Treasury undersecretary for domestic finance, and an adviser to former Sen. Paul Sarbanes, D-Md., on the drafting of the 2002 Sarbanes-Oxley Act.

Gensler also was an early and prominent critic of Libor ― calling for reforms to the system as early as 2012. When Gensler was CFTC chair, the agency settled enforcement actions with several major financial institutions charged with Libor manipulation.[1]

In recent years, Gensler also chaired the Maryland Financial Consumer Protection Commission, which made several recommendations to the Maryland Legislature ― most notably legislation to broaden the fiduciary duty standard to apply to broker-dealers, their representatives and insurance producers.[2]

CFPB Review

Gensler's transition review team is not the only one focusing on review of financial regulators. The Consumer Financial Protection Bureau is the subject of its own 10-person review team, chaired by Leandra English, formerly deputy director of the CFPB and now senior policy adviser to New York Department of Financial Services Superintendent Linda Lacewell.

This is a considerable investment of resources in the transition for a single agency, which suggests there may be a more prominent future role for the CFPB.

Expected Changes in Leadership at the SEC

Following a presidential election, a new SEC chair is usually in place by late winter, though that timing is driven by administration priorities and the economic climate.

For example, after the 2008 election, when the U.S. was deep in the financial crisis, incoming Chair Mary Schapiro began her term on Jan. 27, 2009, underlining the Obama administration's priorities in light of the crisis. In contrast, Chair Mary Jo White began her term on April 10, 2013, and Chair Jay Clayton on May 4, 2017.

Until the Biden-Harris administration selects a new SEC chair, Commissioner Hester Peirce is expected to become interim chair by operation of seniority, when current Chair Jay Clayton departs at year end, as announced. In addition to the appointment of a new chair, there should be a fairly typical year-end and election cycle rotation among the senior staff of the SEC, which generally has trickle-down impacts, as new and open senior staff slots will be filled.

For example, Enforcement Division Co-Director Steven Peikin departed Aug. 14, and Bill Hinman, director of the Division of Corporation Finance, departed Dec. 4.

The first half of of December brought additional departure announcements at both the SEC and the CFTC. SEC General Counsel Bob Stebbins will depart in early January, and Enforcement Division Director Stephanie Avakian will conclude her tenure by the end of 2020.

Trading and Markets Division Director Brett Redfearn will also conclude his tenure by the end of 2020. At the CFTC, Chair Heath Tarbert, who has led the agency since last year, announced that he will be departing in January.

Biden-Harris Administration Priorities and Impact on Financial Regulation

The incoming Biden-Harris administration has announced its priorities as part of its transition plans as follows: COVID-19, economic recovery, racial equity and climate change. Regardless of who is selected as SEC chair, the SEC under the Biden-Harris administration is expected to continue to emphasize the protection of retail investors and market integrity while giving greater weight to ESG matters.

The SEC's existing COVID-19 relief is expected to also continue, as that is a bipartisan issue and one directly in line with the Biden-Harris transition plan's focus on COVID-19.

Continued Focus on Retail Investors

The SEC has emphasized retail investor protection for the last four years, but has done so in a selective manner ― largely in the enforcement realm ― as opposed to a holistic manner.

For example, while Regulation Best Interest is focused on retails investors, other rulemakings — such as those relating to the use of derivatives by registered investment companies and business development companies and improving access to capital in private markets — have not been perceived to be as protective of retail investors.[3][4]

An SEC with a Democratic majority that is focused on building confidence in the economy and the markets will likely broaden the retail investor focus and implement additional regulatory measures or approaches, such as the following:

Reg BI

Given the SEC's work in getting Reg BI over the finish line, and the heavy lift that the industry has undertaken to implement and comply with Reg BI, there will likely not be a wholesale repeal of or significant revisions to Reg BI. More assertive enforcement of Reg BI, however, is expected, with the SEC focusing on the conflicts and care obligations.

This will be in contrast to the 2020 examinations by the Office of Compliance Inspections and Examinations, which focused largely on the compliance and, to some extent, disclosure obligations of Reg BI.

Conflicts of Interest

There will be a continued exams and enforcement focus on conflicts of interest of both broker-dealers and investment advisers, including compensation disclosure issues and revenue sharing.

Custody Requirements for Investment Advisers

The Division of Investment Management has been working through prerulemaking efforts to revise SEC Rule 206(4)-2, known as the custody rule.[5] It is likely these efforts will accelerate as the current custody rule has become unwieldy in the sheer number of interpretations required. In addition, the rule's structure is more suited to advisers with separately managed accounts rather than to fund advisers.

Business Continuity and Remote Supervision

OCIE has focused since March on how broker-dealers and investment advisers have reacted to the COVID-19 pandemic and has already published a risk alert on the subject.[6] This work could lead, in the medium term, to additional SEC guidance, or potentially more prescriptive rulemaking, intended to enhance industry resiliency with lessons learned from the pandemic.

Cybersecurity and Vendor Management

With more remote working, these issues have become even more critical, and have also been the subject of recent OCIE risk alerts.[7] The risk alert provides notice to the industry, such that some enforcement actions may follow, particularly for firms that have neglected to address cybersecurity hygiene and lack appropriate policies and procedures.

With a more regulatory-focused SEC, as with business continuity and remote supervision, these areas may also be subject to additional regulation or guidance.


There is a strong likelihood that the SEC becomes more active in the ESG area, in contrast to the lighter-touch, disclosure-focused activity to date. Until now, ESG-related disclosures have remained largely voluntary in the U.S. and the SEC and its staff have focused on ESG through disclosure alone, whether for public companies or in the investment management space.

For example, OCIE conducted a sweep in 2018 in which it asked firms with ESG product offerings: (1) about their criteria for defining ESG; (2) whether firms were following established principles like the United Nations-supported Principles for Responsible Investments; and (3) to what degree firms were engaging on ESG matters with issuers in which they invest.

OCIE also asked about firms' marketing of ESG products and the degree to which the products were advertised as sustainable or green.

In its report on examination priorities in 2020, OCIE referred to ESG investment offerings as an area of concern in which examiners would pay particular attention. More recently, at least three SEC offices — Boston, Philadelphia and Los Angeles — have begun or continued local ESG-focused exam initiatives.

Looking ahead, the SEC's focus on ESG may take one or more of the following approaches in addition to simply focusing on whether products sold to investors actually are what they claim to be ― a perennial issue for the Enforcement Division:

ESG Regulatory Developments, Existing Taxonomies and Standardized Disclosure

Currently, ESG frameworks in the U.S. remain undefined, in sharp contrast to other countries. A likely initial first step would be the establishment of a cross-divisional ESG working group tasked with examining other countries' ESG efforts.

Similar efforts occurred in the context of crowdfunding during rulemaking pursuant to the Jumpstart Our Business Startups Act. Based on Commissioner Allison Herren Lee's recent climate change disclosure speech, as well as the stated Biden-Harris priorities, SEC staff efforts will likely focus first on climate change.[8]

Names Rule Update

In March, the SEC issued a request for comment on potential updates to the 2001 names rule, which is designed to protect investors from product names that are deceptive or misleading by ensuring that the names of mutual funds and other registered investment products reflect the types of assets in which they actually invest.[9]

In considering revisions to the names rule, the SEC highlighted the growth in sustainable investing since 2001, noting the often subjective and amorphous standards for what constitutes a fund holding itself out as an ESG fund.

Processes Representing ESG Expertise or Credentials

Currently, a claim of ESG expertise relies on undefined terms and market-driven frameworks. As the SEC examines potential rulemakings and definitions, it is expected to focus on the process by which advisers and companies represent and publish to investors their ESG expertise and credentials.

Additional focus on such processes will serve both as an input to any policy initiatives and as a way for existing OCIE initiatives to dive more deeply into potential disclosure issues.

Approaches to Board Structures and Roles

In addition to examining existing taxonomies, the SEC, and particularly the Division of Corporation Finance, may evaluate ESG-related approaches to board of directors structures and roles.

Amy J. Greer and Valerie Mirko are partners at Baker McKenzie.

This article is excerpted from Practical Guidance, a comprehensive practice resource that includes practice notes, checklists, and model annotated forms drafted by experienced attorneys to help lawyers effectively and efficiently complete their daily tasks. For more information on Practical Guidance or to sign up for a free trial, please click here.

Law360 and Practical Guidance are both owned by LexisNexis Legal & Professional, a RELX Group company.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] See e.g., CFTC Orders The Royal Bank of Scotland plc and RBS Securities Japan Limited to Pay $325 Million Penalty to Settle Charges of Manipulation, Attempted Manipulation, and False Reporting of Yen and Swiss Franc LIBOR (Feb. 6, 2013). https://www.cftc.gov/PressRoom/PressReleases/6510-13.

[2] For more information, see Maryland Financial Consumer Protection Commission 2018 Final Report (Jan. 1, 2019).https://www.consumerfinancemonitor.com/wp-content/uploads/sites/14/2019/01/1-Cover-Letter-for-Annual-Report-2018-002-1.pdf.

[3] See, e.g., Use of Derivatives by Registered Investment Companies and Business Development Companies, SEC Release No. IC-34084 (Nov. 2, 2020). https://www.sec.gov/rules/final/2020/ic-34084.pdf.

[4] See facilitating Capital Formation and Expanding Investment Opportunities by Improving Access to Capital in Private Markets, Securities Act Release Nos. 33-10884; 34-90300; IC-34082 (Nov. 2, 2020). https://www.sec.gov/rules/final/2020/33-10844.pdf.

[5] See e.g., Division of Investment Management's Engaging on Non-DVP Custodial Practices and Digital Assets (March 12, 2019). https://www.sec.gov/investment/non-dvp-and-custody-digital-assets-031219-206.

[6] See Risk Alert: Select COVID-19 Compliance Risks and Considerations for Broker-Dealers and Investment Advisers (Aug. 12, 2020). https://www.sec.gov/ocie/announcement/risk-alert-covid19-compliance.

[7] See e.g., Risk Alert: Cybersecurity: Ransomware Alert (July 10, 2020). https://www.sec.gov/files/Risk%20Alert%20-%20Ransomware.pdf.

[8] See Allison Herren Lee, SEC Commissioner, Playing the Long Game: The Intersection of Climate Change Risk and Financial Regulation (Nov. 5, 2020). https://www.sec.gov/news/speech/lee-playing-long-game-110520.

[9] See Request for Comment on Fund Names, SEC Rel. No. IC-33809, 85 FR 13221 (March 2, 2020). https://www.federalregister.gov/documents/2020/03/06/2020-04573/request-for-comments-on-fund-names.

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