While experts had different views about whether last week’s White House memo about regulatory freeze officially applies to an independent regulatory agency like the SEC, most agreed that there will be at least some impact.
This comes as new White House Chief of Staff Ronald Klain to President Joseph Biden sent a memo to heads of executive departments and agencies, asking them to either withdraw or hit the pause button on rules that were crafted in the last days of the Donald Trump administration so that the new administration will have an opportunity to review them before they take effect.
“The memo directs all agencies to confer with the Director of OMB [Office of Management and Budget] before renewing any regulatory activity,” the White House stated. “This action will allow the Biden Administration to prevent any detrimental so-called ‘midnight regulations’ from taking effect, while ensuring that urgent measures in the public’s interest can proceed.”
The Trump administration largely pursued a deregulatory agenda, but the Biden administration is likely to take a different approach.
Some believe that the memo does not apply to independent agencies, citing past administrations that have only encouraged them to comply. Klain’s memo does not explicitly address independent agencies. However, observers say the SEC historically has typically followed the section in similar memos that asked the departments and agencies not to propose or adopt any new rules until the president’s nominees or designated acting heads are in place. But the SEC did not delay the effective date on rules that have already been published in the Federal Register.
What’s in the Memo?
The current White House memo says that rules that have been sent to the Office of Federal Register (OFR) but not published in the Federal Register should be “immediately” withdrawn from the office for review and approval. When the commission issues a rulemaking document, it typically takes a few weeks to be published in the register.
For rules that have been published in the register but have not taken effect yet, the memo said department or agency heads should consider postponing the effective dates for 60 days from the date of the memo, or January 20, 2021. And for rules that were postponed, the memo said that they should consider opening a 30-day comment period for reconsideration of the rules.
How It Could Play out
While the SEC is likely to be affected—taking an expansive view of the memo—some downplayed its real effect on midnight rules.
“I do not think that there are any significant SEC rules that would fall into these categories, except potentially an approval of Nasdaq’s request to have a board diversity component for its listed companies,” Dave Brown, a partner with Alston & Bird LLP in Washington, said. “Regardless, with a split SEC, it’s unlikely there will be any rulemaking until a new chair is in place.”
Biden named former Commodity Futures Trading Commission (CFTC) chairman Gary Gensler to lead the SEC. But he must first be confirmed by the Senate, which could take a few months. Currently, efforts to adopt any controversial rule would be deadlocked since there are two Republicans and two Democrats on the commission.
Gibson, Dunn & Crutcher LLP was careful in assessing whether the memo applied to the commission.
“It does not appear to include independent agencies, though there is some ambiguity; while the memorandum is addressed to executive departments and agencies, its definition of ‘rule’ is expansive enough that it could be read to cover actions by independent agencies such as the SEC,” the law firm said in a client memo. “Either way, this memorandum will likely cause reconsideration of a wide variety of rules proposed or issued in the final days of the Trump administration.”
The memo comes following a flurry of SEC rulemakings especially in the past year under Chairman Jay Clayton, Trump’s appointee. And others believe that the White House memo is significant.
Many investor protection advocates criticized that Clayton’s rulemaking agenda largely focused on rolling back requirements, which they say increases risks of corporate fraud while at the same time reducing corporate accountability to shareholders. On the other hand, companies, which had been pushing the commission to scale back some rules, applauded Clayton’s regulatory actions. They had complained for years that SEC rules were too burdensome while not providing much benefit to capital markets.
“As an independent agency, the SEC could object to it having the moratorium apply to it, but it is unlikely to do so,” Barbara Roper, director of investor protection with the Consumer Federation of America, said. She expected the SEC to view the moratorium as applying to the agency, especially with Acting Chair Allison Herren Lee, who has been a strong voice for investors during her tenure as a commissioner.
“As for the affected SEC rules not being significant, that simply isn’t true,” said Roper, who served as a member of the commission’ Investor Advisory Committee (IAC) for eight years.
For example, a divided commission in November simplified the exemptive offering framework to make it easier for startup and smaller companies to raise funds in private capital markets. Companies use exemptive offerings to issue securities without having to register with the SEC. Such companies do not have to comply with a full set of regulatory requirements that apply to public companies. Two Democrats on the commission, voted against the rule, saying it unnecessarily increases risk for investors.
This particular rule was published in the Federal Register, but it is set to go into effect on March 15.
In another rule adopted in November by a split vote, the requirements in management’s discussion and analysis (MD&A) of financial condition and results of operations were streamlined. This one goes into effect on February 10.
Thus, those rules, among others, could be opened up for public comment. The rules could potentially be reversed though due process would need to be followed.
In any case, “I would expect the SEC to make good use of the moratorium to carefully review all the rules that haven’t yet been finalized—i.e., published in the Federal Register—and all those that have been finalized but are still pending— published in the Federal Register but hadn’t reached their effective date as of the 20th—to decide which would be allowed to go forward, which if any of the non-finalized rules should be withdrawn, and which of the pending rules should be reversed or revised through rulemaking,” Roper said.
This article originally appeared in the January 25, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.
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