Supreme Court Ruling Ends SEC Independence
(Bloomberg Opinion) — When the Supreme Court voted narrowly to preserve the independence of the Federal Reserve at the end of June, many investors breathed a sigh of relief. It may have been premature. Because on the same day, in another decision, the court killed the independence of every federal agency — including the Securities and Exchange Commission.
The consequences of that decision for capital markets are not as immediate, but they are equally profound and have been curiously overlooked. From now on, whoever is president can fire any SEC commissioner at any time, for any reason or none at all. He can reduce the commission to a single member, the chair. The SEC’s traditionally independent enforcement power is now effectively under presidential control.
This matters because the underlying purpose of the SEC is to guarantee that market actors can be trusted. In a real sense, investors trust the honesty and accuracy of financial disclosures because the people who make them can be pursued criminally and civilly if they make material misstatements. Or, in ordinary English: If they lie, they will pay for it.
This function is so fundamental that most investors take it for granted. It helps explain the popularity of cases like that of Elizabeth Holmes, convicted of fraud for misrepresenting her company’s products and subsequently the subject of books and podcasts and films. The appeal of these stories is not only why someone lies to investors, but how anyone could think they would get away with it.
But what if fraud on the markets became increasingly common? The result would be gradually declining confidence in the representations made by corporate actors. That, in turn, would depress the value of all equities and bonds. No private actor could replace the SEC’s enforcement function, because no private actor would have its statutory authority, its resources, or its investigative and judicial power.
It’s easy to see how this could result in a gradual but ultimately meaningful increase in corporate lying. All it takes is for a few people who are being investigated to get their investigations dismissed after some presidential pressure is applied to the SEC. Once the market sees that can happen, the calculus changes. The question is no longer, “Will I get caught?” It is, “If I get caught, will I be able to purchase enough presidential influence to get away with it?”
Smart corporate actors will get ahead of the game by cultivating presidential access and influence first, then taking bigger risks with the accuracy of their disclosures.
Lest you think this is overstated, consider that Margaret Ryan, head of enforcement at the SEC, resigned after six months in the job last March. Reuters reported that she had clashed with the commission’s leadership over investigations into people close to President Donald Trump’s inner circle, including cryptocurrency entrepreneur Justin Sun. In other words, the independence of SEC enforcement is already compromised.
Meanwhile, over at the formerly independent Commodity Futures Trading Commission, crypto firms have received extremely favorable treatment under the leadership of the 36-year-old chair. He is also now the only commissioner, since Trump didn’t bother to fill the other seats.
Current SEC Chair Paul Atkins is an insider who served as a staffer and a commissioner at earlier points in his career, so the potential long-term damage to the SEC has not yet received much attention. What’s more, it is not obvious how the market should value the growing probability of reduced SEC effectiveness. And there will certainly be those who claim that it would be in the interests of any administration to keep the SEC reasonably effective.
But the lack of an immediate market reaction doesn’t mean there won’t be major long-term consequences. Markets may not be able to price the gradual, structural derogation in the quality of regulation and rule of law.
The truth is that it is unrealistic to think that the SEC can be unaffected by a fundamental transformation in how the federal government operates. And because the Supreme Court’s anti-independence ruling is based on the Constitution, not a statute, it cannot be fixed by Congress or a future president. Agency independence isn’t coming back unless the Supreme Court reverses itself.
It’s also true that any presidential administration, whatever its politics, will be tempted to intervene in SEC enforcement. The danger isn’t only under enforcement for those able to get presidential preference. It’s also possible that the commission could target disfavored people and industries.
The whole point of agency independence was that it was supposed to be nonpartisan and apolitical. Decisions crucial to the functioning of the nation were supposed to be based on expertise and experience. For essentially its entire history, the SEC has stood as an example of how agency independence could help markets function well. Its future may well be as a case study of what happens when independence is wiped out.
To be clear, no one really knows exactly what will happen to the SEC now. Some of the avenues of direct White House influence that the Trump administration has pursued were available even when the commission was formally independent. What we do know is that it’s time to start watching the SEC more closely — and asking about the long-term costs of a world in which we can no longer rely on honest, independent enforcement of the securities laws.
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To contact the author of this story:
Noah Feldman at [email protected]
