Analysis

What Biden's Win Means For SEC Enforcement, Leadership

Law360 (November 8, 2020, 5:17 PM EST) -- Joe Biden's victory Saturday over President Donald Trump is expected to herald significant changes at the U.S. Securities and Exchange Commission, a divided agency whose chairman and accommodating approach to big business will likely soon be sent packing.

President-elect Joe Biden, joined by Vice President-elect Kamala Harris, answers a reporter's question at The Queen theater, Tuesday, Nov. 10, 2020, in Wilmington, Del. (AP Photo/Carolyn Kaster)

While he identifies as an independent, Chairman Jay Clayton has overseen a deregulatory push aided by votes from the five-member agency's two Republican commissioners and aligning with the Trump administration's conservative view of the role of government agencies.

Biden won the presidency on Saturday after his apparent victory in Pennsylvania, and while President Donald Trump is continuing to fight the results in court, the former vice president said he would move forward with his transition plans so he could hit the ground running on Inauguration Day in January.

With Biden's win and the forthcoming transition to a Democratic administration, Clayton's days at the helm of the nation's securities regulator are numbered. Biden would likely remove Clayton from the SEC before his term expires in June 2021 if Clayton doesn't resign during the presidential transition in January, as his predecessors Mary Jo White and Chris Cox did during administration changeovers in 2017 and 2009, respectively.

Some litigators in the securities industry suggested that Clayton may resign even earlier than January, given his documented eagerness to return to New York, forcing still-sitting President Donald Trump to install one of the agency's Republican commissioners as acting chair of the SEC until Biden seats a permanent one, with the recently reconfirmed and often outspoken commissioner Hester Peirce standing as a viable candidate.

That said, Nick Morgan, a partner at Paul Hastings LLP and former SEC senior trial counsel, expects Clayton "would stay on until Biden takes office to ensure a smooth transition and continuity."

But whenever a Biden-picked chairman is confirmed by the U.S. Senate, the new 3-2 Democratic majority is expected to guide the agency toward a more aggressive approach to enforcement and regulation than Clayton took during his tenure.

"While Mr. Clayton has undertaken a number of initiatives in the name of 'updating' regulations and has focused his enforcement division on the Main Street investor, the agency has not been particularly aggressive with moving forward on either the regulation side or the enforcement side," Tom Gorman, a Dorsey & Whitney LLP partner and former senior counsel for the SEC's enforcement division, told Law360.

Under Clayton, the SEC's enforcement division has primarily focused on the actions of investment advisers and schemes that target retail investors.

In September 2017, four months after taking office, Clayton announced the establishment of the Retail Strategy Task Force, which promised to use data analytics and technology to identify "large-scale misconduct" affecting Main Street investors, from the sale of unsuitable investment products to microcap pump-and-dump schemes.

At the same time, the agency has shied away from large-scale confrontations with major financial institutions, often opting to use settled actions to address findings of negligence or failures to maintain effective internal controls.

"That is likely to change," according to Howard Fischer, a partner at Moses & Singer and former senior trial counsel for the SEC, who told Law360 it's probable the SEC under the Biden administration "will be better funded and would hire more exam and enforcement personnel."

"You are likely to see a more aggressive enforcement division under Biden, one that would likely be more willing to litigate aggressively against larger financial institutions," Fischer said.

Sean Baldwin, a securities litigation partner with Selendy & Gay, agreed that while the enforcement division would likely maintain the focus on retail investors that was promulgated under Clayton, a Biden appointee would also reprioritize more traditional areas of enforcement that have received less attention in the past four years.

For instance, during the Trump administration, the number of insider trading cases filed by the SEC reached lows not seen since Ronald Reagan was president, according to agency data.

"Expect a more assertive and aggressive SEC with more focus on Wall Street," Baldwin told Law360. "This will mean an increase in investigations, especially of large publicly traded companies, and a higher focus on insider trading."

Perhaps the easiest way to forecast the next four years of enforcement would be to look at the playbook of the Obama administration, which ramped up SEC enforcement in 2009 as the country toiled to combat the economic devastation of the Great Recession.

"There was a spike in SEC investigations and enforcement actions, the likes of which I had never seen before," Baker McKenzie partner Perrie Weiner told Law360.

Following a comprehensive restructuring of its enforcement division in 2010, the SEC brought a record number of enforcement actions in 2011 and 2012, even as the agency was knocked for not suing top executives at Wall Street banks involved in the crisis.

Although some in the industry thought the transition to a new SEC chairman in 2013 might bring a more subdued approach to enforcement, the agency continued to increase the number of actions it brought each year, with actions against public companies rising significantly between 2013 and 2016 before dropping by nearly a third in the year after Trump took office.

With a Democratic administration back in charge, Weiner expects "big business will be on the defensive."

"This will be particularly true [now], given the infirmities in our economy, and the cracks we are already beginning to see," Weiner said. "We have already seen evidence of market abuse, but given dislocation in the marketplace and the economy in general, as a result of COVID-19 shutdowns and [Paycheck Protection Program] funds running dry … you can expect a definite surge in SEC investigations, and enforcement activity."

Of course, the direction of the enforcement division will be guided by the philosophies of the commissioners and the newly appointed chair. Democratic Commissioners Allison Herren Lee and Caroline A. Crenshaw, Trump appointees who took office in 2019 and 2020, respectively, seem likely candidates to step into the role, although Biden may look for new blood to take the reins.

According to Morgan, Biden could aim to send a "tough on Wall Street" message by designating a former U.S. attorney to the SEC chairmanship, noting that "given Preet Bharara's history with President Trump, he seems like a likely candidate." U.S. District Judge Valerie Caproni in the Southern District of New York, a former head of the SEC's Los Angeles office, could also be a solid contender, Morgan said, as could Rep. Katie Porter, D-Calif., who has "locked horns with Clayton a few times since she was elected last year."

Whoever Biden ultimately chooses, "there will be a new sheriff in town, and they won't be friendly to business," Weiner told Law360.

"Biden will likely clean house, implement change, and there will be much tighter regulation," he said.

--Additional reporting by Tom Zanki and Stewart Bishop. Editing by Jack Karp.

For a reprint of this article, please contact reprints@law360.com.

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