President Biden’s SEC Enforcement Program: What Should Private Fund Managers Expect?
As President Biden continues to assemble his economic team, reports have emerged that President Biden will nominate Gary Gensler as the next Chair of the SEC. The nomination of Mr. Gensler would clearly signal a more assertive SEC when it comes to both regulation and enforcement. And while it is too early to predict exactly what that will look like, one thing is virtually certain — the SEC will likely adopt a more aggressive approach towards private funds and their managers, resulting in a marked increase in the number of enforcement actions.
In the Short-term
Until Mr. Gensler (or someone else) is confirmed as Chair, we expect that the SEC’s Enforcement program will remain largely unchanged. Pending confirmation of the next Chair, President Biden will likely appoint one of the Democratic Commissioners as acting Chair. It could be several months before Mr. Gensler is confirmed to be the next Chair – Chairman Clayton was nominated on January 20, 2017, but was not confirmed until almost four months later. Moreover, Acting Enforcement Director Marc Berger recently announced that he intends to leave the SEC by the end of the month, and no announcement has been made regarding his successor.
In the meantime, it is unlikely that we will see substantial changes to the Enforcement program, particularly given the composition of the Commission (two Republican Commissioners and two Democratic Commissioners) until a new Chair is confirmed. If anything, we are likely to see a decrease in enforcement activity in this interim period. But private fund managers should not be lulled into a false sense of security.
In the Longer-term
Once Mr. Gensler is confirmed, we expect to see the SEC adopt a much more aggressive enforcement approach towards private fund managers. While Chairman Clayton’s Enforcement program was very active (the SEC brought 862 Enforcement Actions in 2019, the second highest total ever), private fund advisers benefited indirectly from the SEC’s focus on retail investor fraud – as the SEC’s limited resources were devoted to addressing retail fraud, fewer resources were available to address violations involving private funds. As Enforcement Director Stephanie Avakian explained recently, the SEC relied more heavily on OCIE and the exam program – through deficiency notices and remediation, rather than enforcement actions – to address private fund violations.
That will almost certainly change under the new administration. While the SEC will continue to bring actions relating to retail investor fraud, it is unlikely that Mr. Gensler will make retail investor fraud a top enforcement priority. Instead, we expect that he will place a far greater emphasis on policing Wall Street and areas that have experienced substantial growth and innovation. The likely result: significantly more enforcement actions involving private funds and their managers.
What issues will the SEC likely focus on as it adopts a more aggressive enforcement approach? To answer that question, one should start with the OCIE Private Funds Risk Alert from this past June, which identifies several categories of violations by private fund managers that OCIE has observed during recent exams. We expect that going forward, we are likely to see a return to the approach taken under Chair Mary Jo White, and OCIE will be referring more of those types of violations to Enforcement, rather than only issuing deficiency notices. As a result, we expect to see a significant increase in enforcement actions involving conflicts of interest, fees and expenses and MNPI, related policies and procedures and codes of ethics.
How much more aggressive will the SEC be in its approach towards private funds and their managers? That will depend largely on whether Mr. Gensler is confirmed as Chair and who is selected as the next Director of Enforcement, as well as the SEC’s budget and ability to hire additional staff. But regardless, private fund managers should anticipate far more scrutiny from the SEC and take steps now – including carefully reviewing and tightening their compliance programs – to prepare.