by Cydney Posner
Mary Jo White took the occasion of her final speech as SEC Chair, presented to the Economic Club of New York, to discuss how to maintain the role of the SEC as an effective financial regulator and how the SEC can “continue as a strong independent agency in the current environment.” What is she getting at? White is concerned that the SEC’s independence from the executive and legislative branches is currently in jeopardy and that, without independence, the SEC’s ability to use its expertise to achieve its mission could be compromised.
While the SEC must be accountable and subject to regular oversight, its independence, White contends, is “critical in allowing it to use its expert judgment to do what is best for investors and the markets.” However, she cautions, “recent trends have even raised the question of whether or not the independence of the SEC can be preserved at all.” White highlights two trends that she finds most troubling, especially in the current “delicate” moment: increasingly specific statutory mandates and legislative proposals from Congress seeking to remake the SEC’s rulemaking process.
With regard to the plethora of specific statutory mandates, White acknowledges the propriety of action by Congress “to change the mission of the Commission or broadly direct the agency to address a new risk or market condition. But the highly prescriptive mandates that we see today, which tell us exactly how we should act, are much different. This prescriptiveness frustrates the agency’s ability to exercise its expert discretion effectively, ultimately undermining the goal of the congressional mandate. It is very eye-opening to contrast the broad directives of the 1975 Securities Acts Amendments with the highly detailed requirements set forth in the Dodd‑Frank and JOBS Acts.”
SideBar: One example she may have had in mind is the pay-ratio provision in Dodd-Frank, which many companies have viewed as overly burdensome. But arguably, some of that burden is more justly attributable to Congress’ explicit drafting, which mandated exactly how the compensation should be calculated and for whom — that is, all employees, wherever located. Indeed, the prescriptive nature of the statute initially stymied efforts by the SEC to streamline the analysis required. In 2011, former Rep. Barney Frank sought to amend the provision by limiting the calculation of the pay-ratio information to only cash compensation and only domestic employees. (See this Cooley News Brief.) That effort went down to defeat on a straight party-line vote, as House Republicans opted instead for a bill to repeal the provision entirely as part of The Burdensome Data Collection Relief Act. Fortunately, in the end, the SEC found a way, suggested in comments from the AFL-CIO, to simplify the requirement to a large extent by allowing use of a statistical sampling methodology.
The other problematic trend she cites is the recent proliferation of Congressional actions that seek to change the way federal agencies, including the SEC, issue regulations and guidance. White singles out as an example the Regulatory Accountability Act of 2017, passed by the House earlier this month, which she argues “would impose conflicting, burdensome, and needlessly detailed requirements regarding economic matters in Commission rulemaking that would provide no benefit to investors beyond the exhaustive economic analysis we already undertake. These requirements would also prevent the Commission from responding timely to market developments or risks that could lead to a market crisis. And elements of the CHOICE Act, which could be re‑introduced this session, would similarly undermine agency rulemaking as well as cripple our enforcement capabilities.” In a parting admonition, she urged that the “next Commission must continue to challenge these efforts.…”
SideBar: And, as discussed in this PubCo post, beyond the Regulatory Accountability Act of 2017, there is the Separation of Powers Restoration Act, which provides for de novo judicial review of agency actions, the REINS Act, Regulations from the Executive in Need of Scrutiny Act of 2017, which provides that “major rules” of the executive branch will have no force or effect without a joint resolution of Congress (essentially providing for Congressional veto power over major rulemaking), and the SEC Regulatory Accountability Act, which would also enhance the requirements for cost-benefit analyses of rules proposed by the SEC and provide for post-adoption impact assessment and periodic review of existing regulations adopted by the SEC. (For a discussion of the Financial CHOICE Act, see this PubCo post.) The Republican representatives who sponsored these bills believe they will enable Congress “to wipe out abusive regulation.” Similarly, the REINS Act contends that the congressional vote “will result in more carefully drafted and detailed legislation, an improved regulatory process, and a legislative branch that is truly accountable to the American people for the laws imposed upon them.” However, the Republican majority in the Senate is not filibuster-proof, so it’s possible that none of these bills will become law in their current form — or at all.
White believes that these developments impair the work of the SEC by exacerbating partisanship and undermining the value and impact of the SEC’s expertise: these trends
“tend to increase polarization within the Commission and make it harder to forge consensus. The strength and utility of the agency’s structure depends on an environment that rewards expertise and frank dialogue, not partisan affiliation and political games. If the ability and resolve of Commissioners to act independently diminishes, so too will the opportunity for solutions that, while politically unpopular, best serve investors and markets. The agency depends on being able to consider all views and facts in making an expert assessment, which can be foreclosed by increasingly detailed statutory requirements or unthinking partisanship, whether by Congress or Commissioners. If the SEC’s discretion is not meaningfully preserved, it would be to the significant detriment of both investors and the markets. Even a bipartisan Congress would not be nearly as well equipped to study and conclude the range of technical issues that are inherent in nearly every one of the SEC’s regulatory actions.”
White also spent some time arguing that, for the SEC to be a strong market regulator, it must “be ready to use the full array of tools available to us — not relying on disclosure and enforcement alone.” As she observes, mandatory disclosure has been the SEC’s “central tool” for more than 80 years. But that is not enough, she contends, especially in light of the increased size and complexity of markets. Rather, to adequately protect investors, the SEC must directly regulate key participants in the securities markets: “I think it is clear to all that capital markets today require more than just basic consumer protection — they require constant monitoring and, increasingly, calibrated safeguards and market stability measures.”
SideBar: In this provocative DealBook column, the NYT’s DealProfessor took issue with the notion that sunlight — disclosure — is always the best disinfectant. Instead, he argued, sometimes “disclosure-only” legislation is just “cheap regulation” — legislation that “appears to be more about being able to show that you are doing something, anything about a problem without actually fixing it.” (See this Cooley News Brief. ) While there are “no easy answers to hard problems,” he contends, “isn’t it better to meet [the problem] head on, rather than through these indirect methods that only seem to cause more trouble?”