Mutual fund directors and investment advisors digest

Significant SEC proposals from the previous administration remain unfinished, halting parts of the Gensler agenda, including swing pricing. Unfinished proposals on safeguarding, predictive analytics, and ESG will likely stall, providing relief to firms overwhelmed by new regulations. Less controversial items like investment adviser outsourcing and cybersecurity rules may also not advance or be significantly altered.

The next SEC enforcement may include making e-delivery the default for regulatory communications, benefiting the industry. The new administration might also increase retail access to alternative investments and the private market. In fact, the SEC approved a groundbreaking private credit ETF, making private credit more accessible to individual investors.

Throughout 2025, it will become clearer which initiatives the new SEC administration will unwind, add, or repropose. Additionally, court rulings like Loper Bright and Jarkesy will influence future SEC enforcement.

Since The Vanguard Group, Inc.’s patent expiration in May 2023, dozens of investment managers have filed to establish ETF share class structures for mutual funds. The SEC has yet to approve these for actively managed ETFs, but with a new SEC chairman, these applications may be approved, benefiting capital markets and investors by providing diverse investment options and tax efficiencies.

Under Chairman Gensler, SEC enforcement penalties reached record levels. In fiscal year 2024, the SEC filed 583 enforcement actions, securing $8.2 billion in financial remedies, up from nearly $5 billion in 2023, despite a 26% decrease in actions. Gensler was often criticized for heavy enforcement, particularly around cryptocurrency, which is expected to ease under Atkins. Commissioners Pierce and Uyeda frequently dissented on cryptocurrency-related actions, indicating a potential shift under Atkins.

The new administration is expected to focus more on direct investor harm cases, such as excessive fees, and reduce crypto and private fund enforcement. Atkins prefers a principles-based approach, likely leading to smaller penalties.

The industry is increasingly focused on cryptocurrency and the lack of clear regulation. More cryptocurrency ETFs and ETPs are expected under the new commission. In 2024, the SEC approved Bitcoin and Ether ETPs, having previously only approved cryptocurrency futures ETPs.

In 2025, less enforcement action is anticipated to force companies into an SEC framework not suited for digital assets. The current Safeguarding Rule proposal, including crypto assets, will likely face significant revisions. A more cryptocurrency-friendly approach has emerged under Acting Chairman Mark Uyeda and President Trump.

On January 21, 2025, Uyeda created a cryptocurrency task force led by Commissioner Peirce to collaborate with SEC staff and the public on a sensible regulatory framework for digital assets. The Task Force aims to draw clear regulatory lines, provide realistic paths to registration, craft sensible disclosure frameworks, and deploy enforcement resources judiciously.

On January 23, 2025, President Trump signed an executive order, Strengthening American Leadership in Digital Financial Technology, to establish regulatory clarity and secure America's leadership in the digital asset economy.

Additionally, the SEC rescinded Staff Accounting Bulletin (SAB) No. 121 with SAB No. 122 on January 23, 2025. SAB No. 121 required institutions holding crypto assets for customers to record those holdings as assets and liabilities, hindering banks and broker-dealers from offering crypto custody services. The repeal is expected to increase institutional participation in the crypto service provider space and signals a new regulatory era.

The lack of clear regulatory guidelines from the SEC or CFTC on cryptocurrency has created a volatile environment, stifling innovation. A potential merger of the SEC and CFTC is gaining attention to reduce inefficiencies in securities and commodities law, especially as financial markets grow complex. This merger could reduce regulatory uncertainty over cryptocurrency by creating a unified regulatory body, offering clear and comprehensive guidance to the market and firms, fostering innovation and certainty.

Changes at the SEC may also lead to changes at the Public Company Accounting Oversight Board (PCAOB), including new Board members and policy shifts. The timing and scope of these changes are uncertain, but they would likely follow SEC changes, which appoints the PCAOB Board. Past administration changes in 2017 and 2021 saw PCAOB shake-ups. A new chair and board members could shift the PCAOB towards a more industry-friendly regulatory approach. The controversial NOCLAR proposal from June 2023 might be revised under new leadership to be more workable for audit firms, the legal profession, and public companies.