SEC Outlook: Potential Updates Under Nominated Chairman Atkins

The SEC currently has several notable rule proposals that have received public comment but have not yet been finalized. The potential direction of these proposals is likely to be influenced by the leadership of the new SEC Chairman. Paul Atkins, who is nominated to serve as the 34th Chairman of the SEC, is known for his support of innovation and skepticism toward regulatory overreach.

Custody Rule¹

The proposed changes to rule 206(4)-2 (the Custody Rule) are as follows: (1) broaden the Custody Rule’s scope to cover a wider array of client assets, including crypto assets, and advisory activities, (2) enhance the custodial protections client assets receive under the rule, and (3) update related recordkeeping and reporting requirements for advisers. Atkins has consistently expressed support for cryptocurrency and innovation in capital markets. At the Practising Law Institute’s SEC Speaks in 2022 conference, he criticized the SEC for failing to provide clear guidance on custody protocols for digital assets. Given Atkins’ previous criticism of the proposed custodial requirements for cryptocurrencies included in the proposal, it appears unlikely that the rule will be finalized in its current form.

ESG Disclosures²

In 2022, the SEC proposed Release No. 33-11068, Enhanced Disclosures by Certain Investment Advisers and Investment Companies About Environmental, Social, and Governance (ESG) Investment Practices, which would require enhanced disclosures for funds with ESG strategies and require certain funds to disclose their portfolio investments’ greenhouse gas emissions, among other provisions. Atkins has been a vocal critic of ESG-related regulation. At the SEC Speaks in 2022 conference, he noted that the SEC “seems to studiously avoid trying to define what ESG is.” Additionally, in a comment letter addressing a separate climate disclosure rule³ in June 2022, Atkins and other former commissioners stated that the proposal “oversteps the Commission’s congressionally delegated regulatory authority.”⁴ Given his opposition to such rules and the recent disbanding of the SEC’s Climate and ESG Task Force, it appears unlikely this proposal will be finalized.

Service Providers⁵

Proposed rule 206(4)-11 would prevent registered investment advisers from outsourcing certain services or functions without ensuring minimum requirements were being met by the service providers. The proposal would, among other things, require advisers to complete due diligence before outsourcing services, maintain books and records related to due diligence and the monitoring of third-party service providers, and obtain reasonable assurances that third-party recordkeepers meet certain standards. Atkins has previously criticized the SEC for overly burdensome regulations and disclosure requirements. His history suggests he may oppose this proposal as overly restrictive for advisers.

Compensatory Transactions⁶

In 2020, the SEC proposed amendments to Rule 701 under the Securities Act, which provides an exemption from registration for the issuance of compensatory securities by non-reporting issuers, and Form S-8, the short-form Securities Act registration statement for compensatory offerings by reporting issuers. In a companion release, the SEC also proposed amendments to Rule 701 and Form S-8 to permit, on a temporary basis and subject to certain conditions, an issuer to provide equity compensation to certain “platform workers” who provide services available through the issuer’s technology-based marketplace platform.⁷ These amendments were proposed at the end of the first Trump administration and were intended to reduce regulatory burdens and facilitate equity compensation for the “gig economy,” so it is possible that, under the leadership of Atkins, the SEC would revisit this proposal.

Resales of Securities⁸

In 2020, the SEC proposed an amendment to Rule 144 under the Securities Act to revise the holding period determination for securities acquired upon the conversion or exchange of certain “market-adjustable securities” of unlisted companies. The SEC indicated that the proposed amendment was intended to reduce the risk of unregistered distributions in connection with sales of those securities. The commission also proposed amendments to update the Form 144 filing requirements, which were ultimately adopted in 2022.⁹ These amendments were proposed at the end of the first Trump administration to address a targeted regulatory concern with market adjustable securities, so it is possible that, under the leadership of Atkins, the SEC would revisit this proposal.

Shareholder Proposals¹⁰

In 2022, the SEC proposed amendments to Rule 14a-8, the shareholder proposal rule. The proposed amendments would revise three of the bases for exclusion: (1) Rule 14a-8(i)(10), which permits the exclusion of a proposal that “the company has already substantially implemented”; (2) Rule 14a-8(i)(11), which permits the exclusion of a proposal that substantially duplicates another proposal that will appear on the company’s proxy card; and (3) Rule 14a-8(i)(12), which permits a company to exclude a proposal that addresses “substantially the same subject matter as a proposal … previously included in the company’s proxy materials within the preceding five calendar years” if the matter was voted on at least once in the last three years and received support below specified vote thresholds on the most recent vote. In addition, the SEC noted in the proposing release that it reaffirmed the standards articulated by the SEC in 1998 for determining whether a proposal relates to ordinary business for purposes of Rule 14a-8(i)(7). Atkins has criticized the shareholder proposal process in the past, including the SEC’s narrowing interpretation of Rule 14a-8’s bases for exclusion, so it is unlikely that the SEC would proceed with these proposed amendments to Rule 14a-8 under his leadership, and the agency may undertake a broader effort to revisit the shareholder proposal rule and the SEC staff’s involvement in the interpretation of that rule.

Broker-Dealers and Trading and Markets

On November 21, 2024, a federal judge in the U.S. District Court for the Northern District of Texas vacated the SEC’s February 2024 rulemaking that expanded the definition of “dealer” under federal securities laws to capture large traders regularly providing liquidity to the securities markets. The expansion would have required high-frequency traders, private investment funds, decentralized exchanges, automated market makers, and even state pension plans to consider whether they would be required to register as a securities dealer with the SEC and a self-regulatory organization like FINRA. The SEC deadline for appeal has passed, and the SEC has not appealed the decision, meaning the rule will remain permanently vacated.

In April 2023, the SEC reopened the comment period and provided supplemental information regarding its proposal to amend Exchange Act Rule 3b-16 to expand the definition of what it means to be an exchange under the federal securities laws. This reopening amended and clarified a January 2022 proposal that was widely criticized for its broad and expansive reach. Given that three years have passed since the initial proposal, and more than 18 months since the re-proposal, this rulemaking is fairly dusty. Digital asset exchange enforcement cases have been some of the most aggressively pursued cases relating to digital assets in the prior administration. If the current SEC wants to move forward in this space, it could be an area in which the SEC finds a practical and pragmatic approach that allows entities trading digital assets to find a path to registration.

Finally, given the forthcoming guidance and changes anticipated with respect to the regulation of digital assets, it seems likely that FINRA will pause any additional action regarding broker-dealer digital asset businesses until it receives further cues from the interim or permanent chair about the agency’s overall digital asset approach and strategy. Along these lines, FINRA could eventually revisit its guidance related to digital asset alternative trading systems (ATSs), i.e., the “three-step” and “four-step” processes that ATSs must follow to transact in digital asset securities as well as guidance related to the limited special purpose broker-dealers (of which FINRA has only approved a minimal amount thus far).

Under Atkins’ leadership, the SEC is likely to adopt a more cautious approach to finalizing rules, particularly those related to digital assets, ESG disclosures, service provider requirements, and shareholder proposals. Given his track record of prioritizing innovation and minimizing regulatory burdens, these pending proposals may undergo substantial revisions or be withdrawn entirely.

^[1] Safeguarding Advisory Client Assets, Release No. IA-6240 (Feb. 15, 2023).
^[2] Enhanced Disclosures by Certain Investment Advisers and Investment Companies About Environmental, Social, and Governance Investment Practices, Release No. 33-11068 (May 25, 2022).
^[3] The Enhancement and Standardization of Climate-Related Disclosures for Investors, Release No. 33-11042 (Mar. 21, 2022).
^[4] Comment Letter, The Enhancement and Standardization of Climate-Related Disclosures for Investors (File No. S7-10-22) (June 17, 2022).
^[5] Outsourcing by Investment Advisers, Release No. IA-6176 (Oct. 26, 2022).
^[6] Modernization of Rules and Forms for Compensatory Securities Offerings and Sales, Release No. 33-10891 (Nov. 24, 2020).
^[7] Temporary Rules to Include Certain “Platform Workers” in Compensatory Offerings Under Rule 701 and Form S-8, Release No. 33-10892 (Nov. 24, 2020).
^[8] Updating EDGAR Filing Requirements and Form 144 Filings, Release No. 33-11070 (Dec. 22, 2020).
^[9] Updating EDGAR Filing Requirements and Form 144 Filings, Release No. 33-11070 (June 2, 2022).
^[10] Substantial Implementation, Duplication, and Resubmission of Shareholder Proposals Under Exchange Act Rule 14a-8, Release No. 34-95267 (July 13, 2022).

This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee similar outcomes.