White House effort to control SEC could put investor interests at risk

An executive order posted Feb. 18 by the White House could open the SEC and other independent agencies to direct control and manipulation by political appointees.

The Trump administration order titled “Reining in Independent Agencies” attempts to throw the legitimacy of the independence of federal agencies into doubt and assert the right of the executive branch to control those agencies directly, despite protections in their founding legislation that requires oversight by Congress but bars direct intervention by elected officials or appointees who could manipulate agencies for their own benefit.

The White House billed the order as part of its widely panned effort to impose “fiscal responsibility” on federal agencies by slashing their budgets, drastically reducing their staffs or eliminating particular agencies altogether.

What the order would actually do – according to fund-industry attorneys who discussed the issue with Fund Directions – is put direct control of agencies responsible for the health and legitimacy of the banking and investment industries into the hands of Donald Trump and political appointees with little oversight from Congress or federal courts.

It’s not clear how much of this and other Trump executive orders will be rejected by federal courts or the extent to which the agencies themselves will resist control from the White House.

But, even in an industry looking forward to a lighter approach to regulation following the end of the Biden administration, Trump’s authoritarian approach raises questions larger than complaints about aggressive regulation of a single agency during one presidential administration, according to Carolyn McPhillips, president of the Mutual Fund Directors Forum (MFDF).

“What you’re seeing is a coalescing of executive power and the desire by the White House to vet regulations coming out of agencies,” according to Carolyn McPhillips, president of the Mutual Fund Directors Forum (MFDF).

“My concern is that you have individuals who are not securities law experts reviewing securities laws at both the proposal and final rule stage,” McPhillips said. “The real benefit of having the Commission doing these rules is that they are experts – whether or not you agree with the rules – they are steeped in the securities laws in a way people outside the agency are not.”

SEC protected by rule of law?

That concern – which was also raised by fund-board lawyers and other industry sources who asked to remain anonymous – is unsettling for investment-industry players who expected a change of presidential administration would bring some relief from the pressure of a regulatory agenda they considered far too aggressive during the Biden administration.

A change of presidential administration would, inevitably result in a change of priorities at the SEC, but not a massive change in either its goals or the rules under which it operates, according to Sullivan & Worcester partner David Mahaffey and other industry gurus told Fund Directions in December.

The legal protections built into the laws establishing the SEC and other independent agencies allow oversight from Congress, but are designed to protect the SEC and other independent agencies from politically motivated meddling by either Congress or the White House, they said.

The inertia of agency staff determined to do their jobs in a non-political way and the requirements of due process would bog down any effort at rapid, unsupervised change, Mahaffey said at the time.

“You can sort of make some changes around the edges, but you can’t just undo the rule by saying, ‘We’re going to interpret the rule to mean something completely different than what it says,’”  Mahaffey said at the time.

The appointment of Paul Atkins – a former SEC commissioner and industry consultant known for supporting the role of federal regulatory agencies in protecting markets, though not for being a fan of excessive regulation – reinforced that confidence that the SEC would change, but not all that much, under Trump.

Unprecedented effort at executive control

Both the details and the headline of the Feb. 18 executive order appear designed to reverse all those expectations, however, by not only allowing agency heads to introduce radical reinterpretations of policy, but to give policymakers outside the agency the ability to dictate what those interpretations will be, however.

A fact sheet accompanying the order says all agencies must consult with the White House for approval of their operating priorities and submit draft regulations to the President for review “with no carve-out for so-called independent agencies, except for the monetary policy functions of the Federal Reserve.”

It also says that the Office of Management and Budget (OMB) will take direct control of the budgets of federal agencies and “adjust so-called independent agencies’ apportionments to ensure tax dollars are spent wisely.”

The fact sheet allows for no divergence in policy between federal agencies the White House, which will interpret the law with the assistance of the attorney general “instead of having separate agencies adopt conflicting interpretations.”

“The United States was founded on the principle that the government should be accountable to the people. That is why the Founders created a single President who is alone vested with ‘the executive Power’ and responsibility to ‘take Care that the Laws be faithfully executed,’ according to the fact sheet. That description disregards Constitutional controls that give control over public spending to Congress, which also creates laws including those designed to protect the SEC, Federal Reserve and other agencies from political meddling by either Congress or the White House, and give the right to interpret those laws to federal courts, not the executive branch.

“Executive power without responsibility has no place in our Republic,” the fact sheet says – apparently without irony.

The order requires that federal agencies use a White House liaison to consult with the OMB, the White House Domestic Policy Council and the White House National Economic Council.

“The extent of how that’s going to impact the SEC in particular is unclear because we don’t know who’s doing the oversight at OMB and how they are going to review proposed and final regulations,” McPhillips said. “My concern is that you have individuals who are not securities law experts reviewing securities laws at both the proposal and final rule stage”

Court challenges almost certain

The order is the latest in a series of efforts by the Trump administration to concentrate all federal power under the President rather than sharing power between the executive branch – which is responsible for foreign policy and for executing existing laws – Congress – which is responsible for making laws and decisions about taxes and spending – and federal courts – which are responsible for interpreting laws passed by Congress and the efforts of the executive branch to execute them.

“For the Federal Government to be truly accountable to the American people, officials who wield vast executive power must be supervised and controlled by the people’s elected President,” according to the order.

The directive “represents the largest single assertion over executive power over the administrative state that I can recall, not only in my lifetime but through history,” Wharton School financial regulation professor Peter Conti-Brown told BankingDive for a story posted Feb. 19.

Much of the order, especially those that appear to directly contravene existing law, are sure to be challenged in court, but it is far from clear how much of it would be thrown out by the current Supreme Court, which has been skeptical of the legal support for the independence of federal agencies, Conti-Brown said.

Fund board role: protect investors

Fund directors won’t be directly involved in any potential struggle for power within the federal government, but will still be responsible for protecting the interests of investors regardless of how the industry or its relationship with the SEC changes, McPhillips said.

“The message to fund directors is to continue to put the shareholders first and concentrate on oversight of your funds and your fund complexes,” McPhillips said.

“You can do that regardless of your politics because it’s not political in any way. It’s just what your shareholders expect; it’s your responsibility.”