Amy Lynch on Gary Gensler’s legacy and what’s next for the SEC

Former SEC Chairman Gary Gensler left his mark on the SEC and its various regulatory mandates during his tenure. This will have a direct impact on where the SEC is headed today, either by rolling back and undoing his policy-making or including certain components of it. FrontLine Compliance Founder and President Amy Lynch was interviewed in depth for the Private Equity Law Report 2-part series on “Grading Gary Gensler.”

From FrontLine’s BoardRoom, we are sharing various select comments by Ms. Lynch that are included in the articles. These show both the impact of Gary Gensler’s time at the SEC, as well as discussing how that may change under the current SEC and its new Chairman Paul Atkins.

  • Communication with the industry: “Examinations communicated well through [certain] risk alerts..which provided helpful information about findings and highlighted areas of weakness….”
  • Operational efficiencies: “Examinations pursued more risk-focused exams, which allowed the division to shorten the typical exam cycle and maintain the number of examined registrants….”
  • Inconsistent Rule Applications: On the new Marketing Rule examinations, FrontLine’s clients have “been exposed to various different SEC offices and examiners have been interpreting the Marketing Rule in a range of ways.That is not how it should work.”  It appears examiners were not provided with sufficient training to ensure a consistent approach and predictable outcomes.
  • Enforcement efforts: Enforcement created “its own specialized units to target certain market abuses and initiate its own sweeps.”
  • Potential changes with the new SEC administration: “As opposed to being proactive, I see Enforcement going back to a more normalized approach – i.e. relying more on tips, complaints, referrals from other departments, etc.” With less Enforcement mechanisms, more guidance will be needed “to steer compliance efforts in the private funds industry…such as through risk alerts and FAQs.”
  • Case loads will likely decrease: “Enforcement staff will likely limit the number of cases they pursue under Atkins. Whereas some of the sweeps under Gensler resulted in 30-40 cases, Enforcement [under Atkins] will not have the resources to continue handling that many cases.”
  • Industry guidance: During Gensler’s tenure, “there seemed to be more speeches by SEC commissioners and other staff personnel, as well as the issuance of more risk alerts” that had exceptional usefulness about the examination processes.
  • Rulemaking: “Rulemaking under Gensler was well-intentioned, ambitious and purposeful, but suffered some significant setbacks.” That “will likely change dramatically…and may cease almost entirely under the Trump administration….I think rulemaking is going to be very hard unless it’s something the administration values, which may include crypto regulations.”
  • SEC morale suffered during Gensler’s tenure: Gensler pushed hard early on when the administration was changing, “which may have been tough when morale was already low. Gensler had good management techniques, but his execution could have been better.”
  • Compensation and promotions at the SEC: The trump administration could “introduce new pay caps and change how people are promoted at the SEC, which would be extremely harmful to the agency and result in more attrition in favor of better compensation in the private sector…and make staffing much more difficult.”
  • Relationship with the private funds industry: “The private funds industry was well-examined during Gensler’s tenure and at least received guidance on what their compliance programs should look like through that process.” However, “Gensler made it clear that the private funds industry was in his sights, and that was reflected in the SEC’s rulemaking, examination efforts and enforcement actions. That stance engendered some backlash from the private funds industry…ultimately culminating in the PFAR [new Private Fund Rules] being vacated.”
  • Gensler failed to focus on certain areas: “Gensler’s background put him in a strong position to address cryptocurrencies and digital assets. As opposed to charting a regulatory path forward [for them]…he expended significant resources of Examinations and Enforcement staff to actively take a strong stance against them.”

See Private Equity Law Report (subscription required), “Grading Gary Gensler: Examination Practices, Enforcement Efforts and Industry Guidance (Part One of Two)” and “Grading Gary Gensler: Rulemaking, Culture and Operational Proficiency, and Relationship With Private Funds Industry (Part Two of Two)”