TheCorporateCounsel.net

When new SEC Chairman Paul Atkins showed up for his first day of work, he had a letter on his desk from half a dozen Democratic senators asking about whether the SEC would investigate “actions by President Trump, donors, and other potential insiders that may constitute market manipulation, insider trading, or other violations of federal securities laws in connection with President Trump’s tariff actions and announcements.” The letter also asked for information about how recent SEC staff cuts have affected the agency’s ability to “monitor and respond to large-scale market events, such as the crash following President Trump’s tariff actions?”

Chairman Atkins is extremely unlikely to seek my advice on a response, but if he asked for my thoughts about the insider trading question, I’d probably tell him something like “Forget it Jake, it’s Chinatown.”  On the other hand, I’d tell him that I think the question about the impact of the agency’s staff cuts is one that a lot of people are asking, albeit not in such an overtly politicized way.

For example, the folks at the Shadow SEC recently issued “Shadow SEC Statement No. 2,” in which they warned – in all caps no less – THE CRISIS DEEPENS AS SEC STAFF AND BUDGET CUTS ARE DIRECTED. Here’s what they had to say about the impact of SEC staff cuts on capital formation:

All registration statements must be reviewed and implicitly approved by the SEC’s staff. The difference between an experienced and able staff of reviewers and others with less experience and/or ability can be significant, and the registration process goes much more smoothly when the reviewer is the former. We do not suggest that all registration statements will simply come to a halt after large staff cuts, but the process can be greatly extended and delayed depending on the size of the cuts. This implies that public corporations will be less able to rely on the registration process and may turn to other sources of capital, including bank debt.

Similarly, because of the broad wording of the federal securities laws, and the rapid rate of innovation in financial products, counsel may often need to seek a “no action” letter from the staff. But if the staff is significantly depleted, it may not be able to respond in a reasonable period (in part, because staffers with experience in the area may have departed). One cannot assume that the staff will have the same level of expertise if its size is substantially reduced. Indeed, the sad truth is that ability and mobility go together, and those most likely to leave will be those whom private firms most want to attract.

Pontificating about the review process while apparently failing to appreciate that not all registration statements are reviewed isn’t a great credibility enhancer, and the final sentence of the last quoted paragraph strikes me as a gratuitous shot at the staff. Putting that stuff aside though, the potential impact of staff cuts on the review process and the SEC’s ability to provide guidance are fair points to raise – particularly since these are areas where current commissioners have promised improvement.

– John Jenkins