Back to the future for regulators

Deregulation is expected to be a cornerstone of incoming president Donald Trump’s second term, and that will have significant effects on the SEC and DOL.

Aside from the former and future president’s stated goals of redirecting agencies – particularly the Securities and Exchange Commission – one must only look at his first term to get some idea about what is in store, several lawyers noted.

Expect to see the SEC walk back some of its guidance and regulations, taking a softer stance on enforcement, observers said. And at the Department of Labor, the newest version of its fiduciary rule is highly at risk of being replaced with the earlier iteration passed during Trump’s term. Rules that have not been finalized or have been challenged in court may well be reversed.

“The SEC may take a more restrictive view as to what ‘best interests’ means in Regulation Best Interest (Reg BI), which may lessen the now-slowly increasing number of enforcement actions being brought by the SEC against broker-dealer firms,” said Ron Rhoades, director of the personal financial planning program at Western Kentucky University’s Gordon Ford College of Business, in an email. And, “as with all government agencies, ‘DEI’-type initiatives will likely be eliminated from the lexicon at the SEC,” Rhoades said.

There could be cuts to government spending across agencies, and the SEC could very much be affected by that, he said. Congress could also try to consolidate some of the regulator’s divisions, possibly eliminating some of the consumer-oriented offices or boards, he said.

“There will likely be an initiative to abolish the Public Company Accounting Oversight Board (PCAOB) and FINRA, and merge them into the SEC,” he said, citing language from Project 2025’s playbook. “I believe the Democrats will oppose the move to merge PCAOB into the SEC, but a compromise might be reached. The Democrats may not oppose abolishing FINRA, although this would lead to a substantially larger SEC. If it were to occur, expect that there will be an array of fees imposed upon broker-dealers, asset managers, and RIAs that would take the place of FINRA’s fees while providing the SEC with resources to assume oversight.”

In any case, staff reductions at the SEC could further stem the regulator’s enforcement activities.

“Already I suspect that the broker-dealer industry, after they stop celebrating the election, will be very focused in seeking greater flexibility and latitude from the SEC, so that their basic business model remains healthy,” said Knut Rostad, president of the Institute for the Fiduciary Standard.

“At the SEC, fiduciary duty has been diminished over the past 15 years,” he said. “Even over the last three years, in the context of Regulation Best Interest, it has been even further diminished.”

The fate of SEC Chair Gary Gensler is somewhat of a question, though observers said they expect him to soon announce a decision to leave the commission. Trump has promised to remove Gensler, much to the praise of cryptocurrency supporters, though its unclear whether he can do so. While Trump can clearly select a new chair for the SEC, he could have difficulty firing Gensler from the commission entirely, and an attempt do to so could lead to a showdown in court. Gensler’s term extends through 2026.

There has been speculation about potential successors, with former SEC commissioner Daniel Gallagher, who now is chief legal officer at Robinhood, being among those who could be considered.

“I would not be surprised if Gary Gensler announced in about two weeks that he’s stepping down. More likely he’ll wait until the end of the year to step down, like the prior chair,” Rostad said. “By seniority, the senior Republican Commissioner Hester Peirce becomes the interim chair, if he steps down. And then the new world begins.”

Though Rostad said he does not think Gensler has been a strong fiduciary advocate, a Republican-led SEC will undoubtedly move further away from fiduciary protections for investors, he said.

Congress, particularly if both houses have Republican majorities, can use the Congressional Review Act to halt and undo any recently passed rules, including anything finalized in the Biden administration dating back to July or earlier, said one securities industry lawyer who spoke on condition of anonymity because of client relationships.

“It’s sort of complicated where there is litigation,” the lawyer said. For example, the SEC’s climate disclosure rule for public companies is currently in the Eighth Circuit Court of Appeals, with oral arguments likely to happen within the next three months. “I’m not sure anybody has an answer for what a new SEC chair’s options would be,” the lawyer said.

In such cases, the government could simply decide to drop its defense in cases challenging rules the Trump administration doesn’t support.

Similarly, the Department of Labor’s fiduciary rule, along with its amended prohibited transaction exemptions, has also been challenged in court.

“It’s just deja vu,” said Jason Roberts, CEO of the Pension Resource Institute. In 2018, the DOL’s prior fiduciary rule, passed toward the end of the Obama administration, was defeated in court, and the government dropped its defense in that lawsuit. “We’re almost in the exact same place we were – or we will be soon,” Roberts said.

Currently, there are stays on the effectivity of the fiduciary rule and the exemptions. One exemption, however, PTE 20-02, could survive, Roberts said. That exemption, which was finalized in the first Trump term, was partially vacated in US district court in Florida, reversing the Biden DOL’s interpretation of fiduciary advice for IRA rollovers.

Further, the DOL’s ESG rules, formally called the Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights, have also been challenged in court, with cases brought by state attorneys general.

The Biden-era ESG rules replaced a rule finalized at the end of Trump’s first term, effectively giving 401(k)s and other plans more discretion to include sustainable investment options, including as the default choices for participants, such as target-date funds. The Trump-era rule, which prioritized “pecuniary” factors, did not totally forbid plans from including such investments, but it did prohibit ESG-themed default investment options.

“Having seen how this played out before, I feel like it’s almost predetermined what that rule is going to look like. And I think it’s going to look a whole heck of a lot like the first [Trump-era] rule,” Roberts said.

But one big factor is different this time around, he noted. A recent US Supreme Court decision overturned what is known as the Chevron deference, or the discretion that regulatory agencies have to interpret their authority granted by Congress. That decision stands to limit the power that agencies have to create new rules or expand existing ones, something Republicans have supported as part of a wide opposition to what some have seen as a regulatory state. Perhaps ironically, that court decision could hinder regulatory efforts to overhaul or replace rules the Trump administration doesn’t like.

A top priority of the incoming administration will indeed likely be to change the DOL’s language on environmental, social, and governance criteria, said Fred Reish, partner at Faegre Drinker Biddle & Reath, in an email. Much depends on who Trump nominates for Secretary of Labor, and so far there are not any hints of that, he noted.

“It is likely that the ESG regulation will be rewritten to eliminate any reference to ESG factors and perhaps even to say that QDIAs for defaulting participants cannot be ESG-based. Also, there is a good chance that the new administration will not defend the fiduciary regulation in the ongoing lawsuits,” Reish said. “More broadly, a Republican DOL would be less likely to issue consumer protection regulations, favoring regulations that remove compliance burdens from employers and providers.”