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December 10, 2024

Trump 2.0: Potential SEC Reform Initiatives

Over the weekend, former Chief of the SEC’s Office of Internet Enforcement John Reed Stark posted an in-depth article on X in which he discussed some reforms he expects to see the SEC initiate in the early days of Paul Atkins’ leadership. Stark worked the SEC during Atkins’ last tour of duty and believes he’s an excellent choice to serve as SEC Chair. Based on his experience with Atkins and knowledge of his views, Stark said that he expects to see an “extraordinary, monumental, and urgently required transformation within the SEC, especially within the SEC Division of Enforcement.” Here are some of the specifics:

“Open Jacket” Disclosure Policy in Enforcement Actions. Unlike federal prosecutors, the SEC doesn’t have a policy requiring it to lay its evidentiary cards on the table before instituting enforcement proceedings. During his time as a commissioner, Stark says that Atkins believed that “failing to share critical incriminating — and most importantly, exculpatory — evidence, violated the rights of U.S. citizens and also inhibited the ability of enforcement staff members to candidly explain an investigation to the SEC Commissioners.” He said he expects Atkins to order Enforcement to fully inform potential defendants about the allegations and the SEC’s evidence before entering into settlement discussions.

Backing off Cyber Enforcement & Repealing the Cyber Disclosure Rule. Stark expects that Chair Atkins will put the brakes on the SEC’s cyber disclosure enforcement actions targeting companies that have experienced “good faith mishaps that had no real-world consequences” and to instead focus on cyber-related disclosure fraud. He also expects that Atkins will either ask his fellow commissioners to repeal the cyber disclosure rule or freeze its implementation pending further study.

Deemphasizing Corporate Penalties & Emphasizing Individual Accountability. Stark believes that Chair Atkins is particularly concerned that the corporate managers might agree to a large corporate penalty in order to avoid or reduce sanctions against individual wrongdoers. Stark contends that Atkins thinks this creates a perverse incentive that results in shareholders footing the bill for individual misconduct. He also says that Atkins is concerned that the potential for significant corporate penalties may result in a misallocation of resources by incentivizing the Enforcement Division to chase potential headline grabbing corporate penalties.

The article addresses a number of other potential reforms, including cracking down on what Atkins considers to be the “tyranny of the minority” inherent in the shareholder proposal system, eliminating crypto enforcement, and reducing even further the SEC’s efforts to target ESG-related disclosure shortcomings.

Oh yeah, and one more thing – although Stark didn’t mention this one directly, other media reports continue to indicate that the climate disclosure rule is likely an “ex-parrot.”

John Jenkins