Questioning the extent of regulatory power is becoming the go-to criticism of most SEC proposals, a trend that will only become more prominent now that Republicans control the House.
Even though they only obtained a five-seat majority in the chamber in last November’s elections, it gives the GOP a platform to pound away at the Securities and Exchange Commission. The party will challenge just about every action the agency takes.
They’ll use a recent Supreme Court decision to try to make life more difficult for the SEC and Chairman Gary Gensler. In that case — W. Virginia v. EPA — the court held that under the “major questions doctrine,” regulators must have a mandate from Congress in order to pursue major initiatives.
“Our founders provided Congress with legislative authority to ensure lawmaking is done by elected officials, not executive branch staff,” Reps. Patrick McHenry, R-N.C., James Comer, R-Ky., and Kay Granger, R-Texas, wrote in a Sept. 20 letter to Gensler. “[T]he court’s decision casts doubt on the Securities and Exchange Commission’s authority to develop, finalize and implement a broad swath of regulations.”
They cited several examples, including SEC proposals on climate disclosure, special purpose acquisition companies and cybersecurity.
These were not three random Republicans. They all now chair prominent House committees — McHenry on financial services, Comer government oversight and Granger appropriations.
Gensler, who leads the 3-2 SEC Democratic majority, has taken note of Republican assertions that Congress hasn’t given him the clout to pursue a set of priorities that the GOP -- and many financial industry trade groups — say is too broad and aggressive.
The Office of Management and Budget released the latest update to the SEC agenda earlier this month. In an accompanying statement, Gensler said the agenda reflects a needed refreshing of SEC rules.
“Our ability to meet our mission depends on having an up-to-date rulebook — consistent with our mandate from Congress, guided by economic analysis and shaped by public input,” Gensler said. “The SEC’s regulatory actions on this unified agenda would help make our markets more efficient, resilient and fair, including through rulemaking items we have been directed by Congress to implement.”
Gensler cited authority from Congress twice in a four-paragraph statement, proving once again that the longtime regulator knows how give as good as he gets in political battles.
Every time he turns around, Gensler will have to joust over whether the agency has the power to promulgate certain rules. Take the recent proposal to impose new requirements on investment advisors who outsource services, which can include portfolio management.
The Investment Adviser Association, the Securities Industry and Financial Markets Association and the Investment Company Institute each expressed concern that the SEC exceeded its authority by adding new due diligence and monitoring obligations to outsourcing.
“[T]he proposal includes requirements that are outside the SEC’s authority under the federal securities laws and the cost-benefit analysis is wholly inadequate,” ICI general counsel Susan Olson wrote in a Dec. 23 comment letter.
It’s one thing to assert the SEC is out over its skis on regulatory proposals. But it takes a substantial amount of optimism about the legislative process — at least as it works today — to think that Congress is capable of giving regulators explicit direction on how to oversee the securities and other industries.
Republicans, for instance, had a hard time approving Kevin McCarthy, R-Calif., as Speaker of the House. It took a lot of arm-twisting and accommodating over 15 rounds of voting. The near debacle of not being able to seat a speaker could pale in comparison to the political wrangling that will be required to get the GOP to agree on raising the debt ceiling or funding the government.
Much legislation the House GOP approves is likely to hit a wall in the Democratic-controlled Senate. Gridlock will once again dominate legislating. Good luck trying to instruct regulators in that atmosphere.
Congress also lacks the knowledge of exactly how to regulate various industries. It depends on the expertise of people like Gensler and his predecessor, former SEC Chair Jay Clayton, a Republican.
As the late David Tittsworth told me when he was IAA executive director and I was just starting on this beat, Congress punted to the SEC on investment advice regulation in the Dodd-Frank Act. Rather than outline a specific advice rule, it gave the agency latitude to work its will. The result was Regulation Best Interest, which held up in court.
Congress will always determine the broad parameters of the SEC’s mission and pass individual laws to target emerging problems. But for regulation to work best, agency staff has to play a central role in setting the agenda.
If the answer to the question of whether the SEC can really do that is always “no,” investors, customers and financial advisors will suffer.
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