Trump’s Regime Change at the SEC
Of all the bags being packed in Washington over the next two months, some of the heaviest surely belong to the outgoing Chair of the Securities Exchange Commission Gary Gensler after he announced his resignation late last month. On Inauguration Day in January, he’ll be lugging the battered corpse of a failed and politicized agenda with him out of town.
Strolling past him in the other direction on K Street will be Trump’s recently announced pick to replace him as SEC chair, Paul Atkins. As a former commissioner and seasoned expert in securities from both a regulatory and practice perspective, Atkins is easily one of the most competent and experienced nominees to be tapped for Trump’s second term and faces a relatively smooth confirmation process.
Priorities for an Atkins-led SEC are likely to be a perfect contrast to rulemaking during the Gensler years, which was defined by its irrational and disingenuous war on cryptocurrencies, and, like much of the Biden administration, by subservience to the politically correct tenets of the Environmental, Social, and Governance framework. ESG was the favorite shrine of federal bureaucracies for the last four years and one at which Gensler’s SEC frequently worshipped, offering up mandates that were more about political bullying than any meaningful improvements to transparency.
The SEC’s Environmental Rulemaking
Of all the new disclosure requirements put in place during Gensler’s reign, none were destined to be quite as burdensome, distracting, and wholly unnecessary as his 885-page “Climate Rule” which serves as a prime example of just how bad a bureaucracy can get if it’s allowed to fuel up on taxpayer dollars and drive at full speed under the influence of too much woke Kool-Aid. The rule adopted in 2023 requires expansive new environmental disclosures in corporate filings, most notably on greenhouse gas emissions, the scope and complexity of which are mind-boggling. Among many other requirements, the rule as originally proposed forced companies to disclose not only measurements of gasses produced by their own business but also indirect emissions that occur throughout a company’s value chain from its supply origins through the end of its product’s life.
Even with some of these requirements left out of the final rule, projected costs for companies include vast new reporting systems, countless hours of unending data collection, and massive expenditures for external consulting and audit compliance. The authors of the bloated “Climate” rule appear to have little experience or concern with the practical reality of smaller public manufacturers based in the U.S., many of whom operate with enormously complex supply chains extending to the far corners of the world but also thin margins and minimal resources to spend on new reporting requirements. Every dollar they are forced to spend towards regulatory compliance is another dollar not invested in growing the economy and jobs at home, not to mention one more reason for manufacturing to go elsewhere.
And for what? The ploy that this rule had anything to do with securities regulation was laid bare in subsequent legal challenges and congressional hearings where it was exposed for what it was — a brazen attempt to shame public companies into going along with an ideological mission. Towards that end, it was filled with petty and meaningless requirements like demanding companies address bad weather events ostensibly caused by greenhouse gas emissions in the tacit hope of making them admit, in their own filings, that their Co2 emissions are responsible. The ultimate goal was even more profound — its architects sought to provide the means for a new imagined class of “woke investors” to base investment decisions on a company’s adherence to environmental objectives and political doctrines rather than an expected return on investment.
This new investor class has thus far failed to materialize, and so too has the execution of the “Climate Rule” itself. After years of poor publicity, disastrous Senate hearings, and inevitable lawsuits, the SEC announced in April that it would voluntarily “stay” its implementation of the rule until its poor legal case has been addressed.
Regardless of the rule’s fate under the new SEC regime, multinational companies with a presence in Europe will still have to contend with similar disclosure burdens in the coming years thanks to the army of European Gensler clones that still mind the regulatory stores there. But back home many domestic public companies will hopefully be spared the worst. With Chair Atkins on the way into town, whatever copies of this sad mess are still cluttering up the desks of bureaucrats in D.C. should hopefully light a bonfire in January and become carbon emissions themselves.
Diversity Quotas for Corporate Boards
Next on the incoming chair’s return-to-sanity checklist should be revisiting the SEC’s approach to the doctrine of Diversity, Equity, and Inclusion. DEI has already begun to lose favor in corporate and collegiate settings alike as its discriminatory and in many cases illegal practices have begun to be exposed. On this front, far worse than disclosure requirements on corporate DEI initiatives, Gensler’s SEC openly embraced discrimination in the workplace through its approval of NASDAQ rule 5605(f) on board diversity. This rule forces companies to use race and gender as a determinate factor in who they include on their Board of Directors, requiring certain ratios of female, minority, or LGBTQ+ directors in order to be listed or they must publicly file embarrassing disclosures explaining their failures to be sufficiently woke.
There are all sorts of ways that diversity can and should be encouraged at the highest levels of corporate governance. Studies are often cited by DEI proponents showing that diverse teams are more innovative or make better decisions, which in theory could lead to better financial performance by companies. By mandating rather than encouraging diversity of racial identity and sexual orientation, however, the SEC and NASDAQ acting together have reduced the ability of companies to seek diversity of professional background, expertise, and intellectual perspective among the pool of candidates, which is vastly more important than skin color or sexual identification. Not to mention the fact that the rule violates the principle of shareholder primacy and represents social policymaking far outside the SEC’s scope of authority.
Not surprisingly, this rule remains in peril before the 5th Circuit Court of Appeals with significant ongoing legal challenges, not the least of which is a constitutional challenge that the SEC as a state actor is violating the 14th Amendment by discriminating on the basis of sex and race. The regime change at the SEC and an incoming chair with more respect for fairness, Commission authority, and the rule of law should hopefully put this rule in even greater peril.
Gensler’s Crusade Against Crypto
Perhaps the most impactful area of the SEC’s overreach in the last four years has been its irrational war against cryptocurrencies and the companies pioneering their innovative uses in the marketplace.
Instead of providing badly needed rulemaking on digital assets, from its early days Gensler’s SEC leaned full throttle into a classic “regulation by enforcement” approach, spitting out more than 100 civil actions without providing clarity on the new ground rules, or receiving any statutory authority from Congress.
In order to assume the oversight power necessary to ignite this war, Gensler and his underlings invented a theory that nearly all digital assets aren’t crypto commodities at all, but are instead traditional securities that somehow represent “investment contracts” under U.S. securities laws. Confusion abounded for years as vital questions were left unanswered. What platforms or firms were required to register with the SEC? What exactly made some crypto assets securities while others were commodities? What should the new players do and disclose to protect users and operate legally?
Stakeholders and exchanges pleaded for clarity but received none. Instead, the legal spigot sprayed in all directions as Gensler dispatched unrelenting enforcement attacks against key innovation players like Binance, Coinbase, Kraken, and dozens of others he viewed as part of the sinister crypto scheme. Over just a handful of years, reports indicate that targeted crypto companies spent over $429 million and countless hours fighting these legal roadblocks. Eventually, the actions led to a return volley of lawsuits, including one last year by eighteen state attorneys general who sued Gensler’s SEC for its enforcement oversteps. But the damage was already done. American leadership in the digital asset sector came to a near crashing halt, leading to major firms calling it quits and others such as Coinbase considering moves abroad.
It was never clear why Gensler, a former MIT lecturer on blockchain, was so personally incensed at crypto. In between steering the SEC’s lawfare assaults, he would occasionally froth into microphones about this new industry being rife with “hucksters” peddling “frauds and scams.” More reasonable regulators would recognize cryptocurrencies as a potential path to more efficient and transparent transactions in the markets of the future, and therefore as a valuable tool rather than a dangerous animal to be caged and hobbled. Signs suggest the new Republican-led SEC will reject Gensler’s view of crypto as an industry run by pirates and miscreants needing to be confined in the same dusty box of decades-old securities rules that govern stock issuers.
Its overreach on crypto aside, the Securities Exchange Commission continues to serve a uniquely vital role. Its mission and its employees deserve the respect and support of market participants, as well as political leaders like President Trump. But that mission needs to be followed. Under Gensler’s leadership, the Commission conjured up its own imaginary role as an enforcer of political ideology rather than good governance, and as a crusader against one of the most innovative sectors of the economy. He evaporated much of the public’s respect and goodwill. As we bid him farewell, we can only hope that the new chair will steer the Commission back to its primary duty to protect investors and safeguard the integrity of the greatest free market in the world.
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