SEC's next top cop will take us back to the 1990s

Paul Atkins, Donald Trump’s choice to chair the Securities and Exchange Commission, could signal the end of an era in securities regulation that began with the dot-com bust of 2000 and the scandals that followed. For the sake of investors, he would do well in returning us to the less ambitious but more constructive SEC of the 1990s.

Richard Breeden and especially Arthur Levitt, who between them chaired the SEC through the entire decade of the 1990s, are remembered for vigorous prosecution of objective fraud, such as brokers embezzling from clients or Ponzi schemes, and commonsense regulations that ended (or at least pruned back) the Wall Street old boys club full of self-dealing and conflicts of interest. Neither chair seemed interested in economic or political goals beyond cleaning up financial markets, nor in battling with courts or other regulators.

This was a popular attitude in the 1990s when everyone loved the markets. The stock market only went up, faster than at any time in history, and the occasional down moves were just buying opportunities. Financial markets were underwriting the internet and other exciting technologies that would define the early 21st century. But the technology stock crash in March 2000 and the scandals revealed by the ebbing tide soured the mood. From Harvey Pitt to Gary Gensler, 2001 to the present, SEC chairs have had more aggressive and expansionist agendas, for better or worse. After the financial crisis of 2008, the SEC further changed character, hiring more economists who gained influence over the formerly lawyer-dominated commission.

Atkins served as a top staffer to both Breeden and Levitt, and then as an SEC commissioner from 2002-2008, where he persisted in the 1990s-style regulatory approach. Given his career and the emphasis on deregulation from the Trump administration, he seems likely to refocus the SEC on the core missions of combating objective malfeasance and keeping markets fair, enforcing law rather than changing law, and re-elevating lawyers over economists. His nomination will need to be confirmed by the Senate.

With the essential caveat that many appointees to powerful positions surprise everyone by deviating from the behavior and opinions they evidenced in supporting roles, Atkins is reassuring to people on both sides of the aisle. People who dislike activist regulators, and specifically the campaigns of current SEC Chair Gensler, can expect a quieter, more predictable relationship with the commission. On the other side, people worried about reckless and dictatorial actions by Trump will appreciate an experienced, respected professional who appears to have the willingness and ability to do his job properly despite political pressures. Some Democrats will mourn the likely pullback on issues such as crypto oversight, climate change and diversity, but the realistic ones will accept that Atkins was as good a choice as they were likely to get after losing the election.

I have no crystal ball, but I’m pretty confident that the SEC will shift from trying to make new law by suing crypto and other financial innovators to laying out sensible best practices in multilateral negotiations — with the regulator acting more like an umpire and less like one of the competing teams. If you’re a fan of these innovations, that should lead to more rapid progress and stability. If you think it’s all Ponzi schemes and ways to disguise leverage, you’ll fear that the SEC will allow crooks and delusional optimists to build up the next financial disaster.

I also expect that the SEC will slacken efforts to promote social goals like diversity and fighting climate change via disclosure regulation. Rather than browbeating companies to disclose what progressives think investors should care about, the SEC will probably go back to insisting companies disclose what investors actually do care about. If you think informed investors seeking profits in free markets lead to the best outcomes, you’ll welcome this change. But if you think regulators should nudge companies and investors toward social responsibility, you won’t.

Finally, I predict that an Atkins-chaired SEC will extract fewer gigantic fines for behavior no one thought was illegal or wrong before the investigations. The agency will instead spend more effort discussing practices and urging voluntary improvements, and less effort fining everyone afterward. Almost everyone will welcome this, except perhaps people who think all Wall Street is corrupt, and any money taken from it is a victory for justice.

Overall, the broad middle ground of opinion will greet this choice with approval or at least relief that it could have been worse. No doubt there are some MAGA supporters who would have preferred an outsider pledged to smashing the entrenched elite of regulators and securities lawyers; and many progressives who will miss the activism the SEC has displayed for the last quarter-century, especially if Atkins represents a sea change and not just a temporary swing of the pendulum.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners. Aaron Brown is a former head of financial market research at AQR Capital Management. He is also an active crypto investor, and has venture capital investments and advisory ties with crypto firms.