The GOP’s disappointing returns in November 8’s mid-term elections gives the SEC more room for its ambitious reform priorities, experts tell affiliate title Regulatory Compliance Watch.

A surge in late polls had led some Republican leaders to hope they could take Congress with iron-clad majorities. The SEC and its Chairman, Gary Gensler, were squarely in the GOP’s sights. In the weeks ahead of the mid-terms, Republicans on the House Financial Services Committee blasted Gensler in at least three separate open letters. Election officials were still counting ballots all around at press time, but it was already clear the “red wave” some had hoped for had fizzled into what some called a “red ripple.”

Republicans were still confident they will take over the House of Representatives. Any majority will be thin, though. NBC News, for instance, projected that the new House would break 218-217 in the GOP’s favor. Meanwhile, control of the Senate hung on four states Arizona, Nevada, Georgia and Wisconsin.

Even “safe” Republican seats were much too close for Republican comfort. Historically, Pyrrhic victories chasten political parties and force them to trim their ambitions. All in, it was the worst showing for an opposition party in a mid-term election since 2002.

‘A modest change’


So, what does all that mean for private fund advisers? At best, we can now expect “a modest change in the regulatory climate for the financial industry,” says Mike Hardy, who helps lead Duane, Morris’ private fund practice group.

“The battleground will likely be the regulatory agenda,” he tells RCW. “A Republican-controlled House of Representatives will likely look to curb the SEC regulatory initiatives we’ve seen during the first part of the Biden Administration. Members of a Republican-controlled House could seek to delay rulemaking by the SEC through funding limitations and by imposing information requests on the Commission.”

A GOP-controlled House controls federal appropriations. Republicans could attach policy riders onto spending bills forbidding the Commission from adopting or enforcing new rules. Ahead of the elections, Republicans said they were worried most about ESG, proxy voting, crypto, investor accreditation and the general regulatory burden.

“The question is whether the president thinks these are big enough deals that he’ll throw down on it, and veto a spending bill. I don’t see that happening,” said Ty Gellasch, executive director of Healthy Markets, in an interview months before the elections. “Maybe on climate. If Republicans take both chambers, I would be moderately surprised if these bills in the middle – not the things the president will throw down on, but the things the Republicans care about – are the kinds of rules that get blocked.”

Hearings to come

There will probably be SEC hearings in a Republican-controlled House. The GOP has demanded, for instance, that Gensler explain a technical “glitch” that swallowed comments on 11 different rulemaking notices and forced the Commission to reopen comment periods.

Gellasch says any hearings might be good theater but won’t have much impact on policy. Gensler “is used to getting documents requests, and these kinds of things can turn into hearings and that’s a change, but that’s not really a big deal to him,” he says.

Follow the money


The difficulty for private fund advisers is that GOP interests don’t necessarily line up neatly with their own. Broadly, private funds are gung-ho about ESG – BlackRock, for instance, has called for the SEC to impose disclosure rules on all advisers, registered or not.

Indeed, one of the minor stories of this election is that private fund advisers’ money backed the wrong side. Traditionally, the industry hedges its political bets, splitting donations about evenly, but favoring incumbents. This year, private equity advisers and their advocates donated nearly $147 million to political candidates or causes, according to records kept by the Center for Responsive Politics. Fifty-four percent of those dollars went to Democratic candidates or causes. The last time the private equity industry backed a losing party to that extent was 2002.

“If the GOP wins the House and Senate it is, of course, possible that they will succeed in passing securities legislation that will shape (or curb) Gensler’s rulemaking agenda,” says Kurt Wolfe, counsel to Quinn, Emanuel. “But it’s difficult to say whether any such legislation will directly affect private fund advisers. To the extent there seem to be consensus views among current GOP members on areas where legislation or reform is required, they tend to relate to the digital assets ecosystem and market plumbing issues that are only tangentially related to private funds advisers.”

‘That’s where we are’

Before the polls closed November 8, it was already possible to detect a slightly softer tone out of Republicans. North Carolina’s Patrick McHenry, who is likely to chair the Financial Services Committee in the next Congress, issued a statement reacting to news that crypto firm Binance was acquiring crypto-trader FTX.

“For years, I have advocated for Congress to develop a clear regulatory framework for the digital asset ecosystem, including trading platforms,” McHenry said. “The recent events show the necessity of Congressional action.”

Whatever fights the new Republican majority picks with the Gensler and the SEC, private fund advisers shouldn’t have any illusions about where they stand with regulators.

“He doesn’t necessarily need new rules,” Wolfe says. “When Gensler became chair, I said he was inheriting a ton of principles-based rules that were open to interpretation – the Gensler Commission would get to decide what the principles are and how to enforce the rules. That’s where we are.”