Expect a Significant Shift Under a Paul Atkins SEC

For example:

Crypto Innovation: Acting Chairman Uyeda has already established a task force to develop a legal framework for crypto assets. Commissioner Peirce is leading the task force, which will consider how no-action letters and exemptive orders, as well as rulemaking, may be used to clarify how securities laws apply to digital assets.

The Division of Corporation Finance issued a statement that “meme coins” are not securities. The SEC staff has also rescinded Staff Accounting Bulletin 121, which had, as a practical matter, prevented SEC-regulated firms from taking custody of crypto assets.

Regulatory Sandbox: Commissioner Peirce has promoted “regulatory sandboxes” to test new technologies before firms incur the costs of regulatory compliance. We expect the SEC to use sandboxes to work out issues with digital assets and other emerging technologies. For example, the SEC could use a sandbox to test clearing options for digital assets without exposing traditional financial markets to those risks.

SEC Innovation Hub: Commissioner Peirce has also called for more support from the SEC Divisions for the SEC’s Strategic Hub for Innovation and Technology.

Reshaping Enforcement

The SEC is widely expected to adjust its enforcement posture to address industry complaints of “regulation by enforcement.”

To this end, the SEC has already:

• Dismissed charges against a large cryptocurrency exchange “to facilitate the Commission’s ongoing efforts to reform and renew its regulatory approach to the crypto industry” and “[g]iven the pending work of the Crypto Task Force.” Other crypto firms are also reporting that the SEC is dropping actions against them.
  
• Downsized and refocused the Crypto Assets and Cyber Unit. The new Cyber and Emerging Technologies Unit will focus on fraud committed using new technologies, including crypto and blockchain. Acting Chair Uyeda echoed a 2008 law review article co-authored by Paul Atkins in commenting that: “The unit will not only protect investors but will also facilitate capital formation and market efficiency by clearing the way for innovation to grow.”

Exam Deficiency or Enforcement Action?

We expect the SEC to review internal guidelines for when an examination deficiency should be escalated to an enforcement action or handled with a risk alert.

Calibrating Penalties: In light of recent objections from Commissioners Uyeda and Peirce, we also anticipate an internal review of the current criteria for setting penalties.

Independent Advisory Committee: A 2008 article co-authored by Paul Atkins called for the SEC to conduct an independent review of the Commission’s entire enforcement program.

We expect the Atkins-led SEC to continue its reorganization of the enforcement program and reduce the Division’s delegated authority to commence formal investigations. We also expect the Division’s focus to be on cases in which the SEC can demonstrate investor harm, intent and fraud.

Rulemaking

Anticipated policy efforts on crypto and enforcement will require significant staffing, which may present a challenge as the new Department of Governmental Efficiency seeks staff cuts. Statements by Commissioners Uyeda and Peirce presage additional initiatives that may present staffing challenges.

For example:

Electronic Recordkeeping: In December, Commissioners Peirce and Uyeda issued a joint statement explaining their unease with recent off-channel communications cases that revealed no "achievable path to compliance." Their statement, along with their subsequent “no” vote on the January off-channel cases, suggests that policy work on recordkeeping policies and procedures may be planned.

Proxy Voting: As a commissioner, Paul Atkins voted against the proxy voting disclosure rule for investment companies. Just recently, Commissioner Peirce also sharply criticized the ESG aspects of this rule. The new Commission may direct an assessment of the rule’s effectiveness, building a record to justify amending or rescinding it.

Political Contributions: Commissioner Peirce has objected strongly to the last several cases under Advisers Act Rule 206(4)-5 regarding political contributions by certain persons affiliated with RIAs as imposing unnecessarily broad restrictions on participation in the political process. Acting Chair Uyeda joined her in voting against most of these orders. Rulemaking to narrow rule 206(4)-5 seems likely.

Relaxing Restrictions on Retail Investors

We expect the Commission to reopen a discussion begun in the Clayton-era SEC to consider relaxing current limits on participation by retail investors in privately offered securities, including private funds.

A new factor in the SEC’s rulemaking agenda is the White House’s executive order requiring the SEC to submit all “proposed and final regulatory actions to the Office of Information and Regulatory Affairs (OIRA) within the Executive Office of the President before publication in the Federal Register.” Depending on how this order is implemented, it could significantly slow any changes that the SEC is planning.

Gensler-Era Rules

The SEC is also under pressure to adopt a more backward-looking agenda. In December and early January, several trade associations petitioned to delay, amend or withdraw Gensler-era rules, including amendments to Form PF, Form SHO, the fund names rule, and the rule requiring investment advisers to adopt AML customer identification programs.

On Jan. 20, the president issued an executive order directing all federal regulators to delay and review rules that have been duly adopted but have not yet gone into effect.

The SEC has now delayed the compliance dates amended Form PF and Rule 13f-2/Form SHO. However, the SEC has also signaled its intention to preserve Form SHO’s requirements and defend them against pending lawsuits.

Pending Rule Proposals

The Gensler-led SEC slated the safeguarding and predictive data analytics rules for re-proposal. We expect the SEC and FinCEN to consider the recent letter from the Investment Advisers Association asking them to issue a joint re-proposal of the customer identification rule. We also expect the Atkins-led SEC to rework or withdraw most of the other pending rule proposals for investment advisers and investment companies. The one likely exception is the proposal for joint data standards, a relatively uncontroversial proposal that Commissioners Peirce and Uyeda supported.

Investor protection remains paramount. While the new SEC may emphasize innovation and reduced regulatory burdens, it has also emphasized that investor protection will remain a cornerstone. We expect the Commission to maintain robust oversight of retail investor issues, such as fraud, misrepresentation and conflicts of interest. Indeed, a quick review of actions approved since January 20 shows that the SEC is continuing a robust program of enforcement against misappropriation, fraud, insider trading and other failures to comply with the securities laws. Firms should prepare for continued scrutiny of disclosures and compliance practices to ensure alignment with regulatory expectations.

Conclusion

We expect the next four years to present a host of new regulatory policies for investment advisers to understand and implement. At ACA, we look forward to working through this next chapter with you.

Carlo di Florio is president of ACA Group, a provider of compliance, risk and technology solutions for financial services firms.