In this month’s Government and Regulatory Affairs newsletter, AIMA members were treated to Joe Engelhard, Head of Private Credit and Asset Management Policy, unpacking what the SEC and other regulators might have in store over the next few years. Read the full November edition of the newsletter here.

Prefer podcasts? Joe joins Daniel Austin, Head of Markets and Regulation, on The Long-Short to explore what the next Trump presidency could mean for the private funds industry.

Expect the Trump 2.0 Financial Regulatory Agenda to Mimic 1.0

The basic economic formula for Trump 1.0 was to significantly increase economic growth through fundamental tax reform and lessening regulatory burdens on U.S. businesses.  President Trump’s 2016 Executive Order on financial regulation, “Core Principles for Regulating the United States Financial System,” asked U.S. financial regulators to eliminate or streamline existing regulations to foster a less restrictive regulatory environment, reduce compliance costs and promote a competitive U.S. financial sector.  AIMA expects Trump 2.0 to adopt a similar approach, which will represent a significant departure from the current administration. This post focuses mostly on what could be next from the SEC, as well as some of the work of the Financial Stability Oversight Council ("FSOC") and the banking regulators. 

The SEC

The Republican sweep will have significant consequences for both liquid and illiquid alternatives markets. For the SEC, we expect digital assets and ESG to be two of the top priorities for the new chair.  While digital asset legislation is needed for a comprehensive digital asset regime, we expect the immediate cessation of “regulation by enforcement,” plus incremental guidance by the SEC to provide regulatory “space” for U.S. crypto firms, exchanges and investors until comprehensive reforms can be implemented.  Additional interim steps could include withdrawing the 2019 staff guidance on the analysis of “investment contract”, ending the block on crypto company IPOs, providing greater insights on its interpretation of the Howey Test and withdrawing the changes to the definition of "exchange" that were proposed in 2022, which, if adopted as proposed, would materially and negatively harm crypto markets. 

For ESG, we expect the withdrawal of the proposed ESG rules for registered investment advisers and funds and the eventual elimination of the 2024 ESG disclosure requirements - the exact avenue by which this happens will depend on the outcome of the ongoing litigation.  

More broadly, the current animus towards private markets will likely be replaced by a more balanced approach that is simultaneously supportive of the growth of both public and private markets.  More concretely, this means greater openness to retail access to private markets (i.e., private credit ETF approvals, expansion of co-investment relief and accounting changes that will reduce artificial barriers to the growth of business development companies).  In addition to rules easing retail investors’ access to private funds, additional guidance and relief may be forthcoming regarding the SEC Marketing Rule. 

What will happen to the roughly 1,500 ongoing SEC investigations is a key question.  Certainly, there will be a shift away from the current regulation-by-enforcement mentality, but much will depend on the new SEC chair and his or her selection to lead the Division of Enforcement (the “Division”) before we can know how significant that shift might be.  It is possible that there will be a reduction in the Division’s emphasis on technical violations with no investor harm and very technical interpretations of grey areas where current regulations are less clear.  At a minimum, we expect a significant reduction in crypto-related enforcement cases unless there is fraud or other evidence of wrongdoing. 

Regarding the two ongoing pieces of litigation in which AIMA is involved (one against the Dealer Rule and the other against the Securities Lending and Short Sale Rules), the change in leadership will have an impact on how any appeals proceed, i.e., if the SEC loses, whether or not to appeal, or if the SEC wins, whether to continue to defend the rule(s) at issue on appeal. 

There are a number of SEC proposed rules that have not yet been finalized, but we anticipate that most of them will be formally withdrawn or, at least, re-proposed with significant changes.  Some still-pending rules are: Safeguarding/Custody; Outsourcing; Cybersecurity; Predictive Data Analytics; Security-Based Swaps Reporting and Regulation ATS.  

In addition to removing or streamlining the current SEC rules and outstanding proposals, we also believe that the new SEC leadership will look to propose changes designed to foster greater capital formation. This could impact a wide range of current rules, but a few examples can be found in SEC Commissioner Mark Uyeda’s November 13 remarks to the Small Business Capital Formation Advisory Committee. Uyeda identified a number of possible reforms to increase capital formation for small businesses, including updating the accredited investor definition, addressing limitations in the crowdfunding rules, and looking at changes to the Small Business Investment Company Program. 

The new SEC chair will also be tasked with finishing the work started by Chair Gensler on the clearing of Treasury securities. The cash and repo mandates are set to go into effect in December 2025 and June 2026, respectively; however, there is a lot of work left to be done by both the SEC and industry ahead of these deadlines. 

FSOC and More

Regarding the potential for private markets to create systemic risk, we expect the SEC and CFTC to be more outspoken voices on FSOC against the designation of private funds as systemically important.  More broadly, we anticipate FSOC may repudiate the changes made by the Biden administration to the designation guidelines and analytical framework and revert to a version much closer to the 2019 reforms implemented during Trump 1.0. There could also be an effort to pass legislation to eliminate FSOC's ability to designate nonbank financial institutions as systemic. 

Further amendments to the securitization section of the U.S. banking regulators’ proposed implementation of the Basel 3 trading book rules represent another potentially important rule change that would encourage greater bank use of significant risk transfers.

Looking Ahead

We will continue to build out this post as additional details, e.g., who is nominated to be the next SEC chair, comes to light, so keep an eye out on the AIMA website for more analysis as we head towards the change in administration.  

If you have any questions on the above post, please reach out to Joe Engelhard ([email protected]).