President Biden’s nominee to head the SEC, Gary Gensler, faced a grilling today before the U.S Senate banking committee as his nomination proceeds through Congress. Although the outcome of his nomination technically remains uncertain, his eventual confirmation seems likely. With that possibility in mind, it seems timely to look ahead at some of the issues the agency may address and initiatives the agency may advance under the new administration. As it is, because of some initiatives that already underway, it is possible to project where we might be headed, at least to a certain extent.
First, I think we should anticipate a more active enforcement approach than was in place under SEC Chair Jay Clayton during the Trump administration. I feel comfortable making this projection because of the measures already put in place under Democratic SEC Commissioner and current acting SEC Chair Alison Herren Lee. As reflected in a February 9, 2021 public statement (here), Lee restored the authority of senior SEC Division of Enforcement officials to initiate investigations. This move restored a practice that had been put in place during the Obama Administration but that Trump administration officials had withdrawn in 2017.
When this policy was in force during the Obama administration, the Enforcement Division officials had sub-delegated the investigation authority further to regional and associate directors and specialized unit chiefs. As a result of this dispersed authority, “the number of SEC formal orders of investigations increased significantly,” according to a February 15, 2021 National Law Review article (here). In her statement released in conjunction with her restoration of the authority, Lee said the “delegation of authority will enable investigative staff to act more swiftly to detect and stop ongoing frauds, preserve assets, and protect vulnerable investors.” As the National Law Review article put it, “the effects of this change remain to be seen, but it may be an early sign of the SEC’s plans to be more assertive with Enforcement matters under the Biden administration.”
The second area where the SEC under the Biden administration seems likely to be active is with respect to Climate Change. President Biden has already signaled that climate change-related issues will be a priority for him; among other things, he selected former Secretary of State and Democratic Presidential candidate John Kerry as his “climate envoy.” The likelihood of SEC focus on these issues is reinforced by two additional recent moves by acting SEC Chair Lee. First, on February 1, 2021, Lee named Satyam Khanna as Senior Policy Advisor for Climate and ESG at the SEC, indicating an agency priority for the climate change and other ESG issues. Second, as reflected in a February 24, 2021 public statement (here), Lee directed the SEC Division of Corporate Finance to “enhance its focus on climate-change related disclosure in public company filings.”
Referring to the SEC’s 2010 public guidance on disclosure requirements applicable to climate change matters, Lee said in her February 24 statement that as part of the “enhanced focus,” the Corporate Finance division will review the extent to which public companies are complying with the prior guidance and with disclosure obligations generally under the federal securities laws. The division will also “engage with public companies on these issues, and absorb critical lessons on how the market is currently managing climate-related risks.” The staff will, according to Lee, use insights gathered through this process to “begin updating the 2010 guidance to take into account developments in the last decade.” Lee added that “ensuring compliance with rules on the books and updating existing guidance are immediate steps the agency can take on the path to developing a more comprehensive framework that produces consistent, comparable, and reliable climate-change disclosures.”
Lee reiterated this commitment in a March 1, 2021 statement at an investor conference, in which she emphasized the SEC’s focus on developing a global framework for climate change disclosures through collaboration with global stakeholders and climate authorities.
It is worth noting that the climate change disclosure initiatives may not come from the SEC alone; there are in fact multiple proposed bills in various stages of development in Congress that would address climate change disclosure issues. For example, the Climate Change Risk Disclosure Act of 2021 is currently circulating in discussion draft form, as is the Paris Climate Agreement Disclosure Act of 2021.
Diversity and Inclusion
Another topic that undoubtedly will receive significant SEC attention under the Biden Administration is diversity and inclusion. The topic has already been served up to the agency in the form of the proposed board diversity listing requirements that Nasdaq proposed to the agency late last year (as discussed here). The agency issues its own public statement on the topic of diversity and inclusion at the agency itself. With respect to the kind of board diversity issues that the Nasdaq initiative raises, it is worth noting that in 2019, the agency issued disclosure guidance on board diversity disclosure issues. The question is whether the recent Nasdaq initiatives, as well as other intervening developments such as the rise of the Black Lives Matter movement, will trigger the reexamination of agency’s position with respect to board diversity issues.
In that regard, it is worth noting that at the time Nasdaq presented its proposed board diversity listing guidelines, one of its expressly stated issues in taking up the initiative was to encourage the SEC to consider these issues on its own. However, last month, 12 Republican Senate banking committee members sent the SEC a letter in which they urged the SEC to reject the proposed Nasdaq rules, which the Republican senators described as a “proposed diversity quota.”
Public company disclosure on cybersecurity related issues is already a priority issue for the SEC. In February 2018, the agency issued updated guidance on the issue. The SolarWinds hack, which was first uncovered late last year (as discussed here), underscored not only the vulnerability that all organizations face to coordinated cybersecurity attacks, but also reinforced the sheer breadth and scope of the exposure. As the details of the Solar Winds hack have become better understood, the extent of the exposure has become even more apparent. These and other issues seem likely to ensure that cybersecurity issues will remain a priority in the months ahead for the SEC.
Game Stop/Robinhood/Market Trading and Integrity
In addition to the issues identified above, there are other current topics that undoubtedly will attract the interest and attention of the SEC under the new administration. Among other things, it seems likely that there will be further attention, possibly Enforcement Division attention, on the Robinhood/Game Stop trading fiasco. To the extent that SEC staff concludes that individuals or other traders engaged in manipulation of the price of Game Stop stock or of other securities, there could be further investigative or enforcement action.
Another area that seems likely to at least attract SEC interest is the current proliferation of SPAC IPOs. In the fourteen months between January 1, 2020 and March 1, 2021, there were 450 SPAC IPOs raising approximately $147 billion. This activity shows little sign of slowing down any time soon. The sheer volume of economic activity alone seems sufficient to attract SEC interest. In addition, there are questions and concerns about the activity that informed observers have raised, such as the questions Stanford Professor Michael Klausner has raised, in his November 2020 Harvard Law School Forum on Corporate Governance entitled “A Sober Look at SPACs” (here). The SEC has already issued disclosure guidance for SPACs, in a December 2020 release (here). Whether and to what extent the SPAC frenzy will attract further SEC scrutiny remains to be seen.
There are of course many other potential areas of interest. Cryptocurrency and anti-corruption are hot button issues that undoubtedly will remain the source of SEC staff attention. The lingering effects of the COVID-19 pandemic and their effect on reporting companies undoubtedly will remain a source of concern and attention.