Does SEC Independence Mean A Lack Of Accountability?

by Allen Matkins

Earlier this week, Broc Romanek highlighted a recent panegyric on SEC independence given by SEC Chairwoman Mary Jo White.  Independent agencies are the platypodes of the federal government.  Many are inclined to view independent agencies as part of the executive branch.  But there are problems with that view.

Because the SEC exercises enforcement authority, it would be natural to assume that it is part of the executive branch.  However, the SEC is not directly accountable to the head of the executive branch – the President.  As the Supreme Court has observed: the President can’t fire an SEC Commissioner except under the Humphrey’s Executor standard of “inefficiency, neglect of duty, or malfeasance in office”.  Free Enter. Fund. v. Pub. Co. Accounting Oversight Bd., 130 S. Ct. 3138, 3148 (2009) (Under 15 U.S.C. § 78d(a), SEC Commissioners are appointed for five-year terms).  

If the SEC isn’t subject to the control of the executive branch, then surely Congress can exercise some control . However, the SEC doesn’t seem to be directly accountable to Congress, as evidenced by the following examples:

  • Resource Extraction Disclosure Rules.  Congress gave the SEC a clear deadline for adopting disclosure rules in Section 1504 of the Dodd-Frank Act.  After the SEC had missed the deadline by a full year, Oxfam America was forced to sue.  See Supreme Court Fails To Bite At Bulldog And Oxfam America Sues The SEC.
  • Amendments to Rule 506 Relating to General Solicitation.  The SEC also missed Congress’ deadline for adopting rule amendments permitting general solicitation by more than a year (to be more exact, 371 days, 8,904 hours, 534,240 minutes, or 32,054,400 seconds).  See The Most Important Thing You Need To Know Now About The Lifting Of The General Solicitation Ban.  The SEC also hasn’t been particularly punctilious about other Congressional mandates.
  • SEC Investor Advisory Committee.  Section 911 of the Dodd-Frank Act expressly provides that the chairman of the SEC’s Investor Advisory Committee must not be an employer of an issuer.  Notwithstanding the unambiguous command of Congress, an employee of the State of California chairs the Committee.  The State of California is unquestionably an issuer of billions of dollars in bonds. Moreover there is no doubt about the chairman’s status as an employee of the State, California’s Controller lists the chairman as the state’s third most highly paid employee in 2011, with a compensation exceeding $519,000.
  • Commission Review of Investor Advisory Committee Recommendations.  SEC has also failed to comply with Congress’ requirement that each time the Committee submits a recommendation, the SEC promptly issue a public statement (i) assessing the finding or recommendation of the Committee; and (ii) disclosing the action, if any, the SEC intends to take with respect to the finding or recommendation.  15 U.S.C. § 78pp(g).  Note that this is an obligation imposed on the Commission, not the staff.

Chairwoman White’s speech extols the virtues of independence (“This independence and the quality of its people allow the agency the freedom to do what it believes is right for investors and our markets, without the interference of politics or outside pressures”).  However, the dark side independence is lack of accountability.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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