November 26, 2024 - Last week, Gary Gensler, the current Chair of the SEC, and Jaime Lizarraga, one of its Democratic commissioners, announced their resignations effective late January 2025. Fittingly, on the same day of the Gensler announcement, the SEC lost yet another case involving its aggressive rulemaking, this one relating to its final rule that purported to redefine the meaning of a “dealer”. Following, we unpack what all this may mean.
The resignations. It is customary for the head of the SEC to resign upon the election of a president from the other party and Chair Gensler had signaled his intentions in the wake of the election of Donald Trump. In contrast, Commissioner Lizarraga’s resignation was unrelated to the election. In his resignation statement he noted that his wife has confronted serious illness and that “it is in the best interests of our family to close this chapter” in his public service journey.
What happens next? In the coming days, President Trump is expected to announce his nominee to lead the SEC. If history is a guide, it will likely be several months before whomever he nominates to be confirmed by the Senate. Senior Democrats will also move quickly to nominate a replacement for Commissioner Lizarraga and that nomination, too, will take some time to be confirmed. In the meantime, once Gensler and Lizarraga leave, the SEC will only have three Commissioners, and one of the two sitting Republicans, Hester Peirce or Mark Uyeda, will likely be appointed as interim chair. Consequently, the Republicans will have a 2-1 majority immediately upon the inauguration of President Trump and will ultimately end up with a normal 3-2 majority when all the nominees are confirmed.
What did the SEC litigation decide?
A federal district court in Texas struck down a rule passed by the SEC in February that expanded the definition of “dealer” to include proprietary traders and certain hedge funds. According to the Wall Street Journal, “It would have imposed extra reporting and registration requirements on dozens of firms historically outside the agency’s purview.” The rule was challenged by various hedge fund and crypto industry groups and the court ruled that the rule exceeded its statutory authority. This decision is one in a series of court decisions striking down SEC rules including the Private Fund Advisors Rule in which the LSTA was one of the plaintiffs.
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