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A Critical Summary of Project 2025's Blueprint for Trump's SEC and CFTC with Suggestions

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.

Gary Gensler's Regulation of Crypto by Persecution

2/ @GaryGensler's SEC has adopted Sporkin's approach and is aiming it straight at crypto assets. Instead of having Congress decide whether the SEC or CFTC (or Treasury) is the correct regulator, Gensler is using enforcement suits to seize jurisdiction.

— Steve Bainbridge (@PrawfBainbridge) July 22, 2022

3/ Having staked out his claim to crypto by dragging industry players into court, @GaryGensler is trying to make new law not by complying with the Administrative Procedures Act but by what Karmel might call "regulation by persecution."

— Steve Bainbridge (@PrawfBainbridge) July 22, 2022

An Oldie but a Goldie

In light of the spike in gold prices, I offer my old post: "Civilized People Don't Buy Gold"https://t.co/rX468BMCcG

— Steve Bainbridge (@PrawfBainbridge) November 17, 2021

Conservative Discontents with Capitalism

Samuel Gregg in Public Discourse:

Over the past six years, there has been an eruption of disputes on the American right about the place of markets in modern conservative thought and policy. ... 

These discussions have underscored to me two things. The first is that these conservatives are asking legitimate questions which merit considered responses. Second, however sympathetic I am to their worries, these conservatives’ critiques of markets and their proposed remedies are insufficiently cognizant of some important realities.

Actually, the history of conservative discontents with capitalism long antedates the last six years. I addressed this rich history in my essay Conservative Critiques of Capitalism. I concluded that:

Postwar conservatism in the United States was a somewhat rocky marriage of traditionalists, libertarians, and, later, neoconservatives, united mainly by a shared opposition to communism. Given a seemingly binary and existential choice between Western capitalism and Soviet Communism, American conservatives opted for the former. Yet, despite Frank S. Meyer’s famous fusionism project, the preexisting fault lines persisted. With Communism off the table as an existential threat, the rupture of such a contingent unity along those fault lines may have been inevitable. The task ... is to revive what is best in those traditions and to turn them to the task of reforming capitalism into a practical but humane way of organizing the economy.

Since I jumped ship from The Republican Party to The American Solidarity Party, I've been increasingly exploring Distributism as an alternative. G.K. Chesterton is a good place to start.

Banning short selling in response to COVID-19 proved harmful rather than beneficial

Very interesting post at Oxford Business Law Blog:

France’s financial market regulator, the Autorité des Marchés Financiers (‘AMF’), banned short selling in 92 specified equities for a one-day period, beginning on March 16, 2020 and ending on March 17, 2020. So did the Commissione Nazionale per le Società e la Borsa (‘CONSOB’), the governmental authority of the Italian stock market, by introducing a temporary ban on taking or increasing net short positions in respect of 85 companies’ shares admitted for trading on the Mercato Telematico Azionario (‘MTA’), the Italian regulated stock market. Similar actions were taken by the relevant authorities in Spain, Belgium, Greece, and Austria. In these countries, short-selling bans have been viewed as a possible tool to curb the adverse consequences on stock market liquidity and investors’ confidence. However, although subject to a similar economic scenario, other European countries, such as Germany and the United Kingdom, did not ban short-selling. All bans expired or were lifted on May 18, 2020. The purpose of our study is to examine whether the temporary short-selling bans in the EU during the COVID-19 crisis have achieved the market supervisors’ goals and, more generally, if similar bans are effective and desirable. Our conclusion is that they have are not.

Go read the whole thing, but the bottom line is that countries that banned short selling didn't do their economies or their investors much good.

Using securities filings to assess the merits of Coronavirus bailouts and loans

Gallemore, John and Hollander, Stephan and Jacob, Martin, Who CARES? Evidence on the Corporate Tax Provisions of the Coronavirus Aid, Relief, and Economic Security Act from SEC Filings (June 19, 2020). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2020-81, Available at SSRN: https://ssrn.com/abstract=3631384 or http://dx.doi.org/10.2139/ssrn.3631384

Abstract. We use U.S. Securities and Exchange Commission (SEC) filings to provide initial large-sample evidence regarding utilization of corporate tax provisions by U.S. firms under the Coronavirus Aid, Relief, and Economic Security Act (CARES). These tax provisions were intended to provide firms immediate liquidity to prevent widespread bankruptcies and layoffs in response to the COVID-19 pandemic. However, critics have argued that the provisions were poorly targeted and amounted to “giveaways” for shareholders of large corporations. We find that 38 percent of firms discuss at least one of the CARES tax provisions in their SEC filings, a result primarily attributable to the net operating loss (NOL) carryback provision. Firms experiencing lower stock returns during the COVID-19 outbreak are more likely to discuss CARES tax provisions, but not firms in states or industry sectors exhibiting large increases in unemployment. Further, we find a higher likelihood of tax provision discussions for firms with pre-pandemic losses and higher financial leverage. Finally, we document some evidence that firms facing potential reputational or political costs from discussing these tax provisions may have avoided doing so. Our analyses suggest that tax provisions under CARES were not material for most publicly-traded U.S. firms, were not likelier to benefit firms in greater need of liquidity during the pandemic, and that some firms perceived that disclosing benefits would be costly. These findings are important for policymakers as they consider additional economic relief for U.S. corporations while the coronavirus pandemic lingers.

Refuting the #BailOutPeopleNotCorporations hashtag

From Twitter:

The trending hashtag #BailOutPeopleNotCorporations is founded on a basic error; namely, reification. While it may be necessary to reify the corporation for semantic convenience, it can mislead.

Conceptually, the corporation is not a thing, but rather simply a set of contracts between various persons pursuant to which services are provided and rights with respect to a set of assets are allocated.

When we "bail out" a corporation, what we're really doing is redirected wealth from taxpayers as a whole to the subset of individuals who collectively make up the corporation. We thus have to make a decision: In a period of economic triage, is this group of people worth saving? Are the jobs of these employees worth preserving. Are the savings of these shareholders worth preserving?

Concomitantly, we need to consider the problem of agency costs. Corporations are not democracies. They are run by managers and executives. Hence, once we decide that a particular group of people is worth saving (in an economic sense), we need to ensure that managers and directors cannot divert the "bail out" funds from the desired goals. This is a non-trivial design problem. The TARP bail out in the financial crisis was not well designed. We need to do better this time.

Ann Lipton on WeWork, securities regulation, and capital allocation

Recommended reading.

"Fed Economists Say Bitcoin Can't Compete in World of Trust"

This is sort of interesting:

Bitcoin and other cryptocurrencies solve the problem of making payments in an environment where trust is broken -- but it's unclear whether that's a dilemma that needs to be solved, Federal Reserve of New York economists wrote in a blog post.

Here's the post they referenced.

If we must replace LIBOR, what should the replacement look like?

Bloomberg reports that:

A Federal Reserve-sponsored group that has been working on an alternative is slated Aug. 1 to discuss the timing of the release of the measure. The new rate, which the New York Fed plans to begin publishing daily sometime in the first half of 2018 in cooperation with the Treasury Department's Office of Financial Research, eventually could be the benchmark for pricing some $350 trillion of U.S. derivatives, student loans, home mortgages and many other types of credit.

The meeting of the Alternative Reference Rates Committee follows comments recently by the U.K. Financial Conduct Authority that it intends to stop compelling banks to submit London interbank offered rates by the end of 2021, igniting concerns global regulators may have to speed up their implementation timelines for new alternative benchmarks. According to an interim report, ARRC said it considered and rejected plans that call for a “quicker and more disruptive transition” and recognized that its proposed recommendations “could take several years to accomplish.”

I discussed ideal characteristics of a benchmark in my article Reforming LIBOR: Wheatley versus the Alternatives (January 31, 2013), NYU Journal of Law & Business, Vol. 9, No. 2, 2013, available at SSRN: https://ssrn.com/abstract=2209970.

Some key points:

• It is speculated that, “in globally integrated capital markets,” it does not make “sense to have different benchmark borrowing rates for domestic U.S. and international dollar loans.”
• In an increasingly globalized market, control over such a systemically important benchmark by any single government likely would be a source of on-going tension and perhaps would trigger an arms race of sorts in which all of the major financial center nations seek to privilege their domestic benchmark.
• The US working group therefore should be coordinating with counterparts in other countries to develop a global benchmark.
• If a single global rate is desired, even though LIBOR is a U.S. dollar rate, it makes more sense to have the alternative continue to be produced by a London-based government agency or central bank. This is so because it is widely recognized that one of LIBOR’s major advantages was that the London time zone allowed it to straddle the Asian and U.S. markets.
• The benchmark should look to private sector lending, not government rates. The difference between interbank offering rates like LIBOR and potential government substitutes becomes particularly pronounced during periods of economic uncertainty or crisis. In such periods, there is a flight to quality by investors that drives down the rates on presumptively risk free investments like Treasury bills.Conversely, as was the case in the post-Lehman Brothers crisis, banks become less creditworthy and liquidity in the interbank lending market dries up. In such periods, accordingly, benchmarks based on government or central bank funding costs would be especially inappropriate alternatives to one based on interbank offering rates.
• The benchmark should be administered by a private sector body. The Wheatley Review, for example, expressed concern that “public ownership” would reduce the ability of LIBOR to adapt to changing needs of users.The profit motive gives a private actor an incentive to respond to changing conditions in the markets for its product. In contrast, government agencies and state-owned enterprises lack that incentive.

Replacing LIBOR

Bloomberg reports that:

Saron, Sonia, Tonar and Eonia. Behind the Tolkienesque names are the potential candidates to replace Libor, the global borrowing benchmark that underpins more than $350 trillion of financial products, which as of July 27 is being phased out by 2021.

Attaching a time frame to Libor's demise has shifted into sharp focus efforts by financial authorities from Japan to Switzerland to replace the London interbank offered rate. Aside from being mired in fixing scandals, the benchmark has proven increasingly obsolete because of the lack of data behind the daily morning calculation that has established the level set up by the British Bankers Association in 1986.

Count me as dubious.

In my article Reforming LIBOR: Wheatley versus the Alternatives (January 31, 2013), NYU Journal of Law & Business, Vol. 9, No. 2, 2013, available at SSRN: https://ssrn.com/abstract=2209970, I argued that:

Although some commentators proposed replacing LIBOR with a new benchmark, and some banks went so far as to test alternatives, that option never gained significant traction. Huge costs would have resulted from overturning long-settled reliance expectations in multiple markets, because numerous types of financial instruments and contracts with a total value in excess of $300 trillion referenced LIBOR. Accordingly, Wheatley opined, “that a transition to a new benchmark or benchmarks would pose an unacceptably high risk of significant financial instability, and risk large-scale litigation between parties holding contracts that reference LIBOR.” In addition, Wheatley concluded that there was “no immediately obvious alternative” to LIBOR. As a result, attention focused on developing what Wheatley called “a comprehensive and far-reaching program of reform” of the existing benchmark.

As far as I can tell, that analysis remains sound.

UCLA economists forecast an increase in growth thanks to Trumpnomics

From UCLA Anderson Forecast:

With $500 billion in tax cuts arriving in the third quarter of 2017, the forecast calls for GDP growth to accelerate from its recent 2 percent growth path to 3 percent for about four consecutive quarters and then slide back to 2 percent. Growth will be hampered by the difficulties of stimulating an economy operating at near full employment and the bite of higher interest rates. Employment will continue to grow on the order of 140,000 jobs per month in 2017 and 120,000 per month in 2018.

Of course it's couched in all sorts of anti-Trump caveats, but still.

Interestingly, as California evolves ever more into the Peoples Republic of California, we are likely to disproportionately benefit from Trump's defense and infrastructure spending plans:

“The increase in defense spending will be disproportionately directed to California, as sophisticated airplanes, weaponry, missiles and ships require the technology that is produced here,” he writes. “Moreover, there are few places to build the proposed 150 new warships, and San Diego is one of them. Regionally we expect a positive impact in the Bay Area and in coastal Southern California.” 

It's odd that GOP programs are going to reward and benefit the most looney left state in the country.

The errors of liberation theology

First Things has a succinct review of the basic errors of liberation theology.

More on the negative effect of shareholder activism on the economy

John Coffee reports that:

[A] recent study suggests that there may be real, but long-term, costs from hedge fund activism for the economy as a whole. These researchers took the stocks included in the Wall Street Journal’s and FactSet’s Activism Scorecard and trimmed this sample down to just those campaigns launched by activist hedge funds. Then, they followed those firms that successfully avoided a takeover. They found that these firms, even though they survived the activists’ engagement intact, were forced to curtail their investments in research and development by more than half over the next four years. Specifically, R&D expenses in this sample fell from 18% of sales to 8.12% of sales over that period.[16] Nor was this a general secular trend, because in a random sample of firms not engaged by activists, they found that research and development expenditures rose modestly as a percentage of sales over the same period.[17]

Although still a preliminary study, this finding should not surprise, because it confirms what activists say they are doing. Trian Fund made clear that it wanted to reduce DuPont’s expenditures on R&D. Similarly, when Pershing Square Capital and Valeant Pharmaceuticals made a bid for Allergan last year, Valeant announced that, if successful, it would cut R&D at the combined firm by 69%.[18] Although most pharmaceutical companies typically spend about 20% of their revenues on R&D, Valeant spent only 2.7% of its revenues on R&D.[19] Its business model was to milk acquired companies like cash cows for their cash flow.

This pattern of cutting R&D expenditures (even at companies like DuPont that have historically profited from R&D) may make sense for investors who will be long gone within a year or so.

[16] See Allaire and Dauphin, supra note 1, (finding an average decline in R&D expenditures as a percentage of sales from 17.34% in 2009 to 8.12% of sales in 2013). [Full cite: Yvon Allaire and Francois Dauphin, “Hedge Fund Activism: Preliminary Results and Some New Empirical Evidence” (Institute for governance of public and private corporations, April 1, 2015).]

[17] Id (finding a modest increase in R&D expenditures from 6.54% of sales in 2009 to 7.65% of sales in 2013).

[18] See Joseph Walker and Liz Hoffman, “Allergan’s Defense: Be Like Valeant,” The Wall Street Journal, July 22, 2014 at B-1.

[19] See Joseph Walker, “Botox Itself Aims Not to Age,” The Wall Street Journal, May 19, 2014 at B-1.

But it sucks for the rest of us.

I await a reply from the activists' academic apologists.

The JOBS Act apparently has not solved the problems with the American capital markets

In my essay Corporate Governance and U.S. Capital Market Competitiveness (October 22, 2010), available at SSRN: http://ssrn.com/abstract=1696303, I explained that:

During the first half of the last decade, evidence accumulated that the U.S. capital markets were becoming less competitive relative to their major competitors. The evidence reviewed herein confirms that it was not corporate governance as such that was the problem, but rather corporate governance regulation. In particular, attention focused on such issues as the massive growth in corporate and securities litigation risk and the increasing complexity and cost of the U.S. regulatory scheme.

Tentative efforts towards deregulation largely fell by the wayside in the wake of the financial crisis of 2007-2008. Instead, massive new regulations came into being, especially in the Dodd Frank Act. The competitive position of U.S. capital markets, however, continues to decline.

This essay argues that litigation and regulatory reform remain essential if U.S. capital markets are to retain their leadership position. Unfortunately, the article concludes that federal corporate governance regulation follows a ratchet effect, in which the regulatory scheme becomes more complex with each financial crisis. If so, significant reform may be difficult to achieve.

If you believed the Obama administration and the Democrats' hyoe, the JOBS Act was going to solve the problem. They were wrong, according to a new study by some economists (which I'm more inclined to accept that ones done by law professors masquerading as quants):

We examine the effects of Title I of the Jumpstart Our Business Startups Act (JOBS) for a sample of 213 EGC IPOs issued between April 5, 2012 and April 30, 2014. We show no reduction in the direct costs of issuance, accounting, legal, or underwriting fees, for EGC IPOs. Further, the indirect cost of issuance, underpricing, is significantly higher for EGCs than other IPOs. More importantly, greater underpricing is present only for larger firms that were not previously eligible for scaled disclosure under Regulation S-K. EGCs that are more definitive about their intentions to use the provisions of the Act have lower underpricing than those that are ambiguous. Finally, we find no increase in IPO volume after the Act. Overall, we find little evidence that the Act has initially been effective in achieving its main objectives and conclude that there are significant consequences to extending scaled disclosure to larger issuers.

Interestingly, one of the authors - Kathleen Weiss Hanley - was until very recently an economist at the SEC,