John Jenkins reports that:
With the election in the rear-view mirror, many people are speculating about the potential implications of Trump 2.0 for the SEC and securities regulation in general. Some of these are pretty obvious – Donald Trump promised that Gary Gensler would be a goner “on day one,” and he seems likely to depart even before Trump takes office. The SEC’s climate disclosure rules also are almost certainly on the chopping block, and its long-delayed proposals on human capital management and corporate board diversity disclosures will probably never see the light of day.
Those political footballs may garner most of the headlines during the next few months, but what about the Trump Administration’s approach to more “meat & potatoes” securities law issues? Even though Donald Trump claims to know nothing about Project 2025, plenty of others in his orbit do, and it seems likely that many of the policy objectives laid out in that document will be on the agenda when it comes to securities regulation.
Herewith a critical summary of the Project's proposals, focusing on those in my wheelhouse:
One central focus is reform of the Securities and Exchange Commission (SEC) and related bodies, which the Project's authors argue have evolved into overly complex, costly structures that inhibit economic growth. (There's certainly some truth to that.) It argues that the SEC’s regulatory mandates, developed over decades, have become a burden for companies, with recent rules such as the climate change disclosure mandate purportedly adding prohibitive costs to being a public company. To rectify this, the authors propose reorienting the SEC’s mission to reduce barriers to capital formation, favor transparency, and prioritize traditional financial metrics over politically driven criteria like environmental, social, and governance (ESG) standards.
The blueprint advocates for a simplified securities disclosure system that organizes firms into private, intermediate, and public categories, each with scaled reporting requirements. It's not entirely clear what the authors have in mind here. But two possibilities come to mind. First, by referencing an intermediate category, they may have in mind additional regulatory relief for smaller public issuers. If so, a number of ideas spring to mind:
- Quarterly Reporting Adjustments: Allow small public companies the option to provide biannual or simplified quarterly reports, which reduces reporting frequency and helps alleviate compliance costs without compromising transparency for investors.
- Shortened MD&A Requirements: Limit the Management’s Discussion and Analysis (MD&A) requirements for small companies to emphasize only significant developments and omit extensive discussions of historical financial results and off-balance-sheet arrangements that may be less relevant.
- Broaden Regulation A+ Eligibility: Permit smaller, seasoned public companies to conduct public offerings under Regulation A+, which would allow them to raise capital with less regulatory burden compared to traditional public offerings.
- Increased Offering Caps: Raise the maximum offering limit for Regulation A+ from $75 million to a higher threshold for small public companies, facilitating larger capital raises under more simplified procedures.
- Streamlined Proxy Requirements: Implement reduced requirements for proxy statement disclosures, allowing small public companies to focus on material issues and minimize lengthy governance disclosures.
- Exemptions from Say-on-Pay Rules: Exempt small public companies from say-on-pay and related executive compensation voting requirements, alleviating the burden of preparing detailed compensation reports and disclosures. On say-on-pay, see my article Remarks on Say on Pay: An Unjustified Incursion on Director Authority: https://ssrn.com/abstract=1101688
- Exempt Small Public Companies from ESG Reporting Mandates: As ESG disclosure requirements continue to evolve, exempt small public companies from detailed ESG and climate-related disclosures, reducing complexity and compliance costs for companies with limited resources to manage these disclosures. For a critique of ESG in general, see my book The Profit Motive.
Second, the authors may be referring current SEC Chairman Gary Gensler's proposals for expanding the SEC's oversight of private companies. If so, I urge that the line between which companies are subject to the SEC's regulatory jurisdiction and which are not remain as clear as possible. Requiring disclosures from non-reporting (private) corporations because it could impose excessive compliance costs on businesses that are not publicly traded, potentially stifling innovation, growth, and flexibility that these firms rely on. Public disclosure rules are designed to protect public shareholders; however, private companies raise capital primarily from sophisticated investors who typically require and negotiate access to necessary information independently. Imposing public-company-style disclosures on private firms may not provide meaningful investor protection benefits while undermining their ability to operate efficiently and meet capital needs effectively within the private market’s distinct regulatory environment.
Project 2025 argues for the elimination of the Public Company Accounting Oversight Board (PCAOB) and Financial Industry Regulatory Authority (FINRA), recommending instead that their functions be integrated into the SEC to reduce bureaucracy and enhance effectiveness. As for the PCAOB, I agree. The PCAOB adds excessive costs to public companies through its audit standards and inspections, which disproportionately impact smaller firms. In addition, much of what the PCAOB does duplicates existing SEC oversight functions, creating redundancy without clear benefits in fraud prevention or investor protection.
As for FINRA, however, I disagree. FINRA provides valuable industry-specific insights, quicker responses to industry issues, and a structure that allows for the adaptation of regulatory practices. Its ability to oversee a vast network of broker-dealers through industry-led governance can enhance market expertise that may be diluted if its functions were moved entirely under the SEC.
Entrepreneurial growth is another critical area of Project 2025's focus, with proposals to ease the regulations surrounding entrepreneurial capital formation. Suggested reforms include streamlining exemptions for small offerings and crowdfunding under Regulation A and Regulation CF, removing the accredited investor restriction, and allowing more flexible access to private capital markets. These adjustments are intended to foster broader market participation and empower smaller entrepreneurs to compete in capital markets, enhancing economic dynamism. As discussed above, I favor these proposals. I elaborated on the importance of capital market competitiveness and capital formation in my book chapter Corporate Governance and U.S. Capital Market Competitiveness: https://ssrn.com/abstract=1696303
The blueprint envisions significant changes to the oversight of securities markets to strengthen their functionality and accessibility. It proposes preempting state-level securities registration requirements for securities traded on national exchanges and dismantling regulatory barriers that limit market liquidity. Congress should repeal disclosure requirements viewed as tangential to financial returns, such as those in the Dodd-Frank Act related to CEO pay ratios and mine safety. Additionally, the authors argue for terminating programs like the Consolidated Audit Trail (CAT), which they suggest have become financially burdensome without adding equivalent value. I would gladly see most of the corporate governance provisions of Dodd-Frank and Sarbanes-Oxley repealed. See my book Corporate Governance After the Financial Crisis.
Digital asset regulation is an area of particular interest, with a call for coordinated oversight between the SEC and the Commodity Futures Trading Commission (CFTC). Instead of relying on enforcement actions that have sown confusion and hindered innovation, both agencies should establish clear, unified rules to define the regulatory status of digital assets. The proposed framework differentiates securities from commodities, recommending that only digital assets offering revenue shares or liquidation rights be considered securities. In the absence of regulatory coordination, the authors recommend that Congress enact legislation to clarify digital asset classifications, empowering the CFTC to regulate digital assets not meeting the criteria of investment contracts, which sounds reasonable.
Finally, the blueprint emphasizes a restrained approach to federal influence over business operations, particularly opposing mandates that require businesses to engage in socially-driven disclosures. It criticizes federal initiatives aimed at redefining the purpose of businesses to address societal goals and argues for returning to a model where corporations focus on shareholder value rather than broader social or political objectives. This is accompanied by calls for the elimination of disclosures deemed extraneous to financial performance. All of which is consistent with the arguments made in my book The Profit Motive.
In sum, while I recognize that much of Project 2025 is highly controversial, many of the proposals for SEC reform are good ideas that I and other conservative/libertarian corporate law commentators have long supported.
