At the end of last year, in this post on the CLS Blue Sky Blog, two leading authorities on securities law, Professors John C. Coffee, Jr. and Joel Seligman, made some predictions about SEC regulation under the new Administration. (See this PubCo post.) In light of their concerns about the potential changes to the SEC under the new Administration, they announced their intent to form a “Shadow SEC,” composed of acknowledged experts in securities regulation, intended to encourage debate through the presentation of “cogent and factual arguments”: “Such a shadow body—more scholarly than political—might frame issues in fuller detail and offer less drastic alternatives.” Although “[c]larity and objectivity will not always win,” they suggested, “sometimes they might. That is enough to justify the effort.” In Shadow SEC: The Value of an Independent SEC, the Shadow SEC takes on the February 18 Executive Order, which sought to rein in the independence of “independent” federal regulatory agencies, such as the SEC, by ensuring that they all operate under the President’s authority and supervision. (See this PubCo post.) Not surprisingly, they had some concerns.
In its first group post, published at the end of last month on the CLS Blue Sky Blog, the newly formed “Shadow SEC,” composed of John Coates, James D. Cox, Jill E. Fisch and Merritt B. Fox, along with Coffee and Seligman, present their views about the importance of the independence of the SEC. They credit the “institutional design” of the SEC “that protects the independence of securities regulators and assures strong enforcement” with much of “the success achieved worldwide by U.S. capital markets.” In their view, that “success has depended upon the regulatory certainty that U.S. securities laws have provided over the years. Put simply, lower cost capital is a major contributor to economic growth and depends on an independent SEC.”
Citing the text of the Exchange Act, the group contends that the SEC was intended to be “a bipartisan, expert, and independent agency,” protected from partisan pressure through its composition of commissioners from both parties and for-cause removal protection, with political accountability provided through appointment of the Chair by the President and budgetary constraints set by Congress. And, they explain, these two aspects—independence and political accountability—have “enabled the Commission to achieve its statutory goals.” The Executive Order, they assert, “threatens this balance.” More specifically, they argue that the Order would subordinate independent agencies to the White House and OMB; as a result, the reduced role of commissioner of a significant federal agency would likely no longer attract “high caliber, experienced, and public-spirited persons who have many other opportunities to use their time for other ends.” In addition, the need to “submit agency strategic plans” to the Director of the OMB would add “a new, political chokepoint on regulatory change, including changes both to protect investors and enhance capital formation. In such an environment, we doubt that persons of high talent and expertise would be willing to leave their current position for government service, or that the agency would continue to be able to respond effectively to changes in the capital markets or the broader economy.”
The group argues that the SEC’s independence has been critical to the success of the U.S. capital markets: it has allowed the SEC
“to resist both populist pressure to attack capital amid recessions and after crashes as well as efforts to weaken its investor protection through industry capture. While its political accountability remains intact through the appointment by the president of the chair, the SEC also has built and preserves a degree of public confidence precisely because its specification and civil enforcement of the securities laws have not been fully subject to ‘flip-flopping’ (alternating between distinct approaches to the same policy question) that can be driven by increased politicization and full political control of an agency whose tasks—the structuring and sustaining of complex capital markets—span decades. Political differences have mattered—required disclosures have been added and trimmed over time, for example. But the core of the legislative structure has remained durably intact across both business and political cycles.”
The U.S. has the “deepest and biggest capital markets in the world,” they say, because these basic protections and limitations have bolstered predictability. And “[i]nvestment depends on predictability. Regulatory changes introduce uncertainty.” According to the group, “[c]apital formation has had to overcome less of a drag in the United States precisely because of the independence and bipartisan nature of the SEC.”
“What would happen if the SEC in fact loses its independence?,” they ask.
“Concentrated interest groups can be expected to pressure each new administration to change regulation in ways that might not be in the interest of investors and the public and that might not enhance capital formation. Entrenched companies could seek to have the SEC build regulatory moats to prevent competition. Parties seeking to avoid the rigors of the SEC’s disclosure regime may succeed in having that regime diluted and subject to expanded exceptions, making share prices less accurate and eroding the efficiency of the pricing of capital and distorting the manner in which U.S. firms are operated. Moreover, history has repeatedly reflected the development of new and complex investment products to which the SEC must respond with sufficient attention and sophistication to balance the costs and benefits of their market impact. If, instead, the SEC were directed to rely on political expediency, dispassionate and balanced responses would be displaced.”
But “[g]enuinely bipartisan regulatory independence” can curb the impact of politics on changes in laws and regulations by creating “stability in the law-specifying process at the federal level,” reducing “the power of small but concentrated interest groups,” and facilitating the input of long-term constituents in the SEC’s policy process. If a president could simply remove commissioners at will, it “would undermine investment and the economy generally.”
Historically, the group maintains, commissioners have been viewed as “independent so they can carry out Congress’ delegated legislative tasks, and all presidents have chosen to only lightly direct even the chair, respecting the Senate-confirmation process that has ensured that only truly expert and experienced individuals have occupied that role.” White House staff have been not been involved in directing the SEC’s operations, but political accountability is maintained through an elected Congress. This bipartisan, independent structure, they contend, has constrained the impact of politics; the SEC has been able “to carry out its charge to draw on their combined expertise to specify the details of the disclosure and other components of the securities laws, as required by Congress. ‘Flip-flopping’ has been confined to a small number of issues for which staff provide non-binding guidance. Those issues, while not trivial, are not as fundamental to capital formation and investor protection as a range of other, more core regulations and policies. Without full independence those more fundamental policies could become the subject of partisan attention and rapid change, raising the costs of capital and harming the U.S. economy.”
To the Shadow SEC, the “SEC’s independence has mitigated the unfortunate recent increase in partisanship at the SEC.” If that independence were destroyed, “it would inevitably increase sharply partisanship at the agency, not just in this administration, but in those administrations that follow. Rapid and sharp swings in policy would increase and spread. Today’s victors will predictably become tomorrow’s losers. Policy swings would increase in frequency and significance….The SEC’s independence has proven to be invaluable over the last century. It should be preserved.”
