The importance of returning the SEC to its roots as a regulator was Acting Chair Mark Uyeda’s theme as he opened the Security Industry and Financial Markets (SIFMA) annual Compliance and Legal (C&L) conference in Austin last week. Speaking with SIFMA President Kenneth Bentsen, Uyeda focused on prosecuting fraud and maintaining public confidence in US markets.

Across the board, the CFTC, the SEC, and FINRA have signaled that they are “going back to basics,” but the exact contours of the future remain uncertain.

Uyeda commented on the SEC’s string of court losses in 2024, which he said led to “soul-searching” at the agency over whether it should continue its aggressive course. He underscored the need to clean up the SEC’s previous tendency to “regulate by enforcement,” and to increase the comment window on rule proposals to give the industry ample time to react and offer suggestions.

Uyeda criticized the agency’s previous tendency to rush through rulemaking and described the agency’s new mission as a quest to achieve “normalcy.” Without ample time for notice and comment, rulemaking at the SEC became a “piece of theater,” he said, leading to rules that were ineffective or poorly implemented. Uyeda endorsed expanding the comment period to a 60-day standard.

That opinion was echoed by Bentsen, who described a common disconnect between the industry and the SEC as one between an imaginative architect and a realistic engineer: “You want us to do what?”

Pausing rules

Part of Uyeda’s return to normalcy will mean hitting pause on 20 rule proposals, which SIFMA General Counsel Saima Ahmed referred to as a “prudent and necessary” development.

Off-channel communications enforcement, a common industry gripe, was also signaled to be a thing of the past. In another panel, Acting SEC Enforcement Director Sam Waldon signaled that it would be unlikely that further actions would be recommended unless there was a broader pattern of misconduct. Those views have been echoed by SEC Chair-nominee Paul Atkins.

This marks a dramatic turnaround from the NSCP National Conference in October, where opinion seemed evenly split over whether those dramatic fines would continue under a potential Trump administration.

Bentsen also thanked Uyeda and the SEC for undoing the requirement that personally identifiable information (PII) be stored in the Consolidated Audit Trail (CAT). SIFMA had taken a strong stance against its inclusion in the CAT due to concerns over potential for cyber breaches.

Overall, Uyeda’s message was well-received by industry participants, many of whom were excited about a future free from tough enforcement and onerous rulemaking. However, some concern lingered about whether the SEC and other agencies could retain their status as premier regulators in light of looming staff reductions and budget cuts.

Predictions

A panel comprising former enforcement directors from FINRA, the SEC, and CFTC made similar predictions for the future of regulation.

All agreed that a focus on retail fraud would remain, with a diminished focus on off-channel communications enforcement, absent evidence of misconduct. They noted that previous dissenting SEC Commissioners referred to off-channel communications enforcement as “a game of whack-a-mole,” “excessive,” and questioned if it “was really efficient.”

Panelists also predicted that the CFTC would move away from crypto enforcement and move back into traditional commodities markets.

They further predicted an overall “downward pressure” on penalty severity, and a retreat from enforcement actions that required “creative” statutory interpretation, a hallmark of the SEC’s previous enforcement actions against crypto platforms that the agency has now dismissed.

The panelists predicted agencies would clamp down on their previous regimes of “regulation by enforcement,” which one defined as enforcement using a patchwork of case law, with little or input from the public, and with injunctive relief that sometimes places unique penalties on certain firms.

One panelist stated that investigations “based on curiosity” would also be reduced. The standard for the SEC to issue a subpoena is “official curiosity,” and requires no suspicion of wrongdoing, a stance previously criticized by SEC Commissioner Uyeda.

DOGE days: consolidation on the horizon?

The panelists also addressed cuts at the agency commensurate with DOGE’s efforts to de-fang federal agencies, noting that it is likely that many staff members of the SEC and CFTC might voluntarily depart their agencies in the coming months to years, leading to a loss of expertise that could be difficult to rebuild.

But working with reduced staff and funding might yield unexpected efficiency, a panelist noted: the reductions might lead to more cross-agency collaboration and increased parallel enforcement actions. But it was also noted that President Trump’s DOJ might have different priorities than other agencies going forward, potentially mitigating this possibility.

FINRA in the future

FINRA’s future was also discussed, with one panelist describing legal threats to the SRO as potentially “existential.” That grim pronouncement refers to Alpine Securities and related cases that challenge FINRA’s ability to unilaterally dole out sanctions under the “private nondelegation doctrine” and Appointments Clause of the Constitution.

Some panelists expressed optimism that FINRA might continue to have a future without an enforcement function, but in a separate panel with FINRA staff, skepticism was evinced over the SRO’s efficacy as an arbitrator, noting that arbitration was often expensive, onerous, and lengthy.

FINRA’s enforcement director highlighted that there would be less “creativity” in its rule enforcement, while also emphasizing that the SRO was working to accelerate the resolution of complex cases. He also stated that there would be a move to create consistency regarding AML rules and make progress on its data analysis capability.

Future of disgorgement as a remedy

The panelists also discussed the future of disgorgement as an appropriate remedy in actions where a regulator can show unjust enrichment but cannot demonstrate the existence of victims who suffered actual pecuniary harm.

The use cases of disgorgement has been limited in scope by a series of court decisions; however, the SEC continues to use it to rake in huge penalties.

Enforcement matrix

The CFTC’s recently announced enforcement matrix was enthusiastically supported by industry participants. The first of its kind, the matrix specifically delineates what percentage of a potential fine can be shaved off through self-reporting, cooperation, and remediation.

Will fines decrease in severity now that the CFTC will be held to honor an industry participant’s meritorious conduct? CFTC Enforcement Director Brian Young made no promises but reiterated that the agency will make a bona-fide effort to review a regulated entity’s meritorious conduct.

A concern that was voiced by the panel’s moderator was that if penalties did not decrease from the pre-matrix era, critics could accuse the agency of simply starting with a larger-than-usual fine and shaving it down, with the net penalty a foregone conclusion. But Young offered some reassurance that the agency would try to avoid the appearance of “reverse-engineering” penalties with the matrix in mind.

He also made sure to note that the new credit matrix would not penalize industry participants for either invoking the Fifth Amendment or attorney-client privilege, a guarantee that was met with appreciation.

Young added that the agency would be moving away from “creative” interpretations of existing law to justify going after crypto industry participants.

When the subject of AI came up, he noted that there would not be specific enforcement of AI-related capacities, other than a focus on combatting AI-enabled fraud, including “AI-washing.” He emphasised: “Fraud is fraud.”

The SEC’s Waldon urged a similar “disciplined approach” to sanctions, invoking the agency’s 2006 statement on financial penalties, while noting that it “was not guidance.” That statement urged caution and restraint, noting that innocent shareholders often bear a heavy burden from such penalties.

Like Uyeda, Waldon stressed “going back to basics,” with a focus on going after fraud and market manipulation, including retail investment fraud, elder fraud, insider trading, and offering fraud.