What the Trump administration will mean for wealth managers

Andrew Harrer/Bloomberg

One of the first regulatory priorities likely to die under the incoming Trump administration: the SEC's campaign against firms' failures with so-called off-channel communications.

The Securities and Exchange Commission's sweeping investigation into wealth managers that don't properly track and record employees' messages sent using WhatsApp and similar services has yielded more than $3 billion in fines under current Chair Gary Gensler. It's also been greeted with accusations of overreach and "regulation by enforcement."

Industry lawyers and regulatory experts agree it will be one of the first things to go after President-elect Donald Trump takes office in January. Trump has made no secret of his opposition to much of the SEC's current regulatory agenda, vowing to fire Gensler "on day one."

Trump has yet to announce who Gensler's successor will be. But the outlines of his administration's likely priorities can already be made out from his public statements and a list of favored GOP policy stances labeled Agenda 47.

Slowdown in "penalty only" cases

Carlo di Florio, the global advisory leader at the compliance firm ACA Group, said he generally expects the SEC to slam the brakes on "penalty only" enforcement cases presenting no particular victim. And the main example of those are the off-channel communications that have hit the biggest wealth managers — from J.P. Morgan, Morgan Stanley and Bank of America on down — with individual penalties sometimes running into the hundreds of millions.

Those cases rest on a general failure to follow the SEC's recordkeeping rules, rather than any alleged instances of investors suffering harm. Di Florio said those are exactly the sorts of enforcement actions he expects to go by the wayside in the second Trump administration.

"There may be a number of cases that are already in process and maybe they still go forward," di Florio said. "But as a focus area, there's no investor harm. They're penalty-only cases."

The two current Republican appointees to the SEC — Hester Peirce and Mark Uyeda — have both expressed misgivings about the agency's enforcement of off-channel communications rules. The coming handoff of power is likely to make their voices only louder. 

Meanwhile, industry groups like the Financial Services Institute, which represents independent financial advisors, welcomed Trump's election in November with a stated hope that he would end "regulation by enforcement." FSI and similar organizations complained that the SEC under Gensler used enforcement actions to impose new requirements on firms, rather than simply hold them to rules already on the books.

Putting the brakes on new rules

Di Florio said he thinks the next SEC chair will step back from the breakneck pace of rulemaking pushed by Gensler. Even though Gensler has suffered some setbacks in his push to have new regulations passed, he's also managed to shepherd more than 40 proposals over the finish line.

The pace has left many in the industry complaining they have been given too little time to adjust and led to a series of court challenges over central pieces of Gensler's regulatory agenda. Di Florio said the next chair is likely to step back from proposing new rules and instead devote more energy to simplifying and clarifying those already on the books.

One regulation due for some attention, di Florio said, is the SEC's marketing rule. This rule, adopted before Gensler took office, generally requires firms to use only verifiable statements in advertisements and other messages to current or potential clients. It has also been at the heart of a series of high-dollar settlements between the SEC and individual firms.

"The marketing rule continues to be a very challenging rule for some in the industry," di Florio said. "Even if enforcement is slower and less aggressive, you could see some clarity and guidance brought to bear. We could see a new chair coming in and saying, 'Let's clarify this.'" 

Digital assets and AI

Trump's Agenda 47 makes no specific mention of the marketing rule, off-channel communications or other recent SEC enforcement priorities. But it does vow to pull back regulation on two of the current administration's other enforcement priorities: artificial intelligence and digital assets.

Agenda 47, for instance, takes particular aim at an executive order President Joe Biden signed in October 2023 setting guidelines for the safe development of advanced AI systems. "In its place, Republicans support AI Development rooted in Free Speech and Human Flourishing," according to the agenda.

Gensler himself had proposed a rule requiring financial advisors and others to eliminate or neutralize any conflicts of interest that might arise from their use of AI, machine learning or similar systems for predictive market analytics and other purposes. That proposal was sent back to the drawing board following industry protests that it could be applied to mundane applications like spreadsheets.

The SEC has also been cracking down on firms for alleged instances of "AI-washing" — or claiming uses of the technology that aren't backed up by fact. Adrienne Gurley, a former SEC senior counsel and now a partner at the Los Angeles-based firm Venable specializing in white-collar defense, said she would expect those sorts of cases to become far less common.

"Agenda 47 says they'll 'repeal Joe Biden's executive order that hinders AI innovation and imposes radical left-wing ideas,'" Gurley said. "That's a quote from Agenda 47. And that directly contradicts what the SEC is currently doing with some of their AI-washing cases."

Another of Gensler's regulatory targets that's expected to benefit from deregulation is of course cryptocurrency and other digital assets. Agenda 47 pledges, "We will defend the right to mine Bitcoin, and ensure every American has the right to self-custody of their Digital Assets, and transact free from Government Surveillance and Control."

"The current SEC has a number of crypto cases that they're involved in, and who knows what's going to happen to those," Gurley said. "But I think it'll be hard for the SEC to move forward with any new crypto cases in coming years, just based on that [Agenda 47] directive."

Less 'stick,' more 'carrot' with crypto

Some think that the enforcement actions brought against crypto firms in recent years have now cleared the way for a new period of innovation with digital assets. Guided by Gensler's skepticism, regulators have brought big cases against Changpeng Zhao, the founder and CEO of the crypto exchange Binance Holdings, and Do Hyeong Kwon, the CEO of the digital asset firm Terraform Labs, as well as the exchanges Coinbase and Kraken.

Aaron Kaplan, the founder and CEO of the digital assets firm Prometheum, said the "stick" may have been needed to rid the industry of some bad behavior. Now he's ready for regulators to step in with "carrots" to encourage experimentation.

Kaplan's firm, the first to become registered as a special-purpose broker-dealer licensed to custody digital assets, has long been an advocate of bringing the crypto industry under some sort of regulatory framework. 

"People can make the argument that crypto was a bit of a cesspool and there were a lot of scammers," Kaplan said. "Now that period is over, and hopefully we will see the ability for real regulatory innovation to flourish now that the bad actors have been eliminated and the industry can move forward."

'Kinder, gentler SEC'

Or other bad actors will simply be able to step forward as regulators turn their attention elsewhere. Joseph Wojciechowski, an investment fraud lawyer at Chicago-based Stoltmann Law and vice president of the Public Investors Advocate Bar Association, said he's not seen any sign the industry has come close to being cleaned up.

"From my perspective as a consumer protector, we have a ton of crypto work," he said. "There's an incredible amount of fraud. The lack of regulation in the crypto space is devastating to people, and it's ruining lives. Plain and simple."

Wojciechowski said he's also worried Republicans will move to open so-called private markets further to regular investors. Private equity, private credit and similar vehicles all can offer strong returns but often come with high fees and barriers to pulling money out.

To put money into private investments, investors usually still have to qualify as "accredited." That label applies only to people with a net worth of at least $1 million or more (excluding a primary residence) or more than $200,000 in annual income in each of the previous two years ($300,000 for couples filing jointly).

Various pushes have been made in recent years to lower those thresholds for the purpose of giving investors greater choice.

"I think that the SEC position under Trump, in a lot of ways, is going to harken back to buyer beware," Wojciechowski said. "The kinder, gentler SEC, as it was once was called. And I think that deregulation tends to go well for the markets up until the point where it becomes clear it's not working. That's when the chaos takes hold, at which point the markets will step back very quickly."

States step up

States could feel called upon to fill any perceived regulatory void, said Peter Dugas, executive director at the management consulting firm Capco and the lead of the firm's center of regulatory intelligence in Washington, D.C.

"We already saw this with the governors of California, Illinois, New Jersey," Dugas said. "They all publicly announced immediately after the president was reelected that they were going to serve as the governor on the president's policies and enact their own policy proposals that would be a counterweight to the president's approach."

Dugas also noted that any legislative attempt to, say, lower the barriers to investing in private markets would have to muster at least 60 votes in the Senate to overcome a filibuster. Democrats are unlikely to let that happen with proposals they believe will expose investors to risks.

But even if regulators lighten their touch with crypto, AI, private markets and other more exotic investing opportunities, they aren't necessarily abandoning the field to fraudsters. 

The more things change …

David James, an advisor and managing director at Westport, Connecticut-based Coastal Bridge Advisors, a registered investment advisory with $3.5 billion under management, said he has seen enough new regulators arrive in office to know sweeping changes at a level likely noticeable to regular investors are unlikely.

"That's always been my experience over a long period of time and administrations sort of coming and going," James said. "Now there is some suggestion that the level of change could be greater this time around. We'll just have to see. But I expect things to remain mostly the same."

Di Florio too noted that a change at the top of the SEC doesn't necessarily filter down to big shifts in the rank and file. It is, of course, possible that Trump will appoint a firebrand who tries to push the agency in an unprecedented direction.

But Trump's SEC chair in his first term, Jay Clayton, was generally seen as someone eager to pursue the basic responsibilities of protecting investors and holding fraudsters to account. Trump reconfirmed his faith in Clayton by naming him U.S. attorney for the Southern District of New York, where he'll regulate a broad swath of the securities industry.

"Most of the people at the SEC are career professionals," di Florio said. "And they wake up every day and they go and do the good work that the SEC does to protect investors, market integrity and capital coordination. And those 4,000 people are going to wake up tomorrow, go back to work, regardless of who the chair is."