President Biden's appointment of Gary Gensler as Chair of the US Securities and Exchange Commission (SEC) in the spring indicates that the watchdog will take a more aggressive approach to securities law enforcement.
Gensler, a former investment banker and MIT professor who previously chaired the Commodity Futures Trading Commission under the Obama administration, assumed office in April 2021.
Chair Gensler's stronger enforcement strategy will not come as much of a surprise, based on the differences between the Trump and Obama administrations, his background and his statements to date.
Studies have shown the number of public companies that faced charges under Trump was 40 percent lower than under Obama.
Chair Gensler's predecessor, Chairman Jay Clayton, repeatedly stated he focused enforcement efforts on securities fraud that affected retail investors. Chair Gensler, on the other hand, is expected to revert to prioritizing prosecutions of large Wall Street financial institutions and public companies.
During his first testimony before Congress as the SEC Chair, he highlighted key priorities, including: SPACs; private equity and venture capital funds; and crypto assets. Further, the SEC Enforcement Division created a new ESG task force focused on climate and other ESG disclosures.
SPACs
With respect to SPACs, which have already raised more than US$100 billion this year, the SEC has identified several risks. The SEC is concerned that the interests of SPAC sponsors are not aligned with the retail investors hoping for a rise in share price after the SPAC secures a deal. The SEC is also concerned that SPACs may bring private companies into the public markets without the same level of vetting that occurs with an IPO, thereby risking the SPAC is acquiring a company with undisclosed baggage.
Private funds
In addition to SPACs, Chair Gensler has noted that over the last five years there has been a 58 percent increase in the number of private equity funds and a 110 percent increase in the number of venture capital funds. Further, as the SEC is the primary regulator of registered investment advisors to these funds and there is no self-regulatory organization like there is for broker-dealers, Chair Gensler has pointed out that it is important to hold these entities accountable when violations are found. In particular, the SEC's Enforcement Division will focus on disclosures of investment risks and conflicts of interest, fees and expenses, liquidity, valuation of assets and protecting material non-public information.