At a recent "SEC Speaks" event, SEC Commissioner Daniel Gallagher expressed significant concerns about the approximately 100 specific mandates under the Dodd-Frank Act that require SEC rulemaking. Commissioner Gallagher noted that with the '33 and '34 Acts, Congress had "established the SEC as an expert, independent agency with the authority to administer the federal securities laws", and that Congress historically "has avoided imposing minutely detailed mandates on the [SEC]… For nearly eighty years, the [SEC], like other independent agencies, has brought its expertise and judgment to bear in fulfilling the legislative mandates established by Congress in the federal securities laws."
Commissioner Gallagher observed that many of the SEC mandates under the Dodd-Frank Act "are highly prescriptive, and instead of directing the [SEC] to regulate in an area after studying the relevant issues, compiling data, and determining what, if any, regulatory action may be appropriate, they require the [SEC] to issue strictly prescribed and often highly technical rules under short deadlines."
SEC rulemaking has historically been a slow and deliberative process by the SEC and its staff who will research a topic, issue, solicit and consider public comments to proposed rules and questions, and after the consideration of those public comments adopt final rules with an implementation timeline that takes into account a cost benefit analysis. This rulemaking process is in conflict with the mandates and rulemaking timelines required by the Dodd-Frank Act and the more recent Jumpstart Our Business Startups Act (the "JOBS Act"). Moreover, SEC commissioners and high ranking members of the Division of Corporation Finance at the SEC had issued public statements in opposition to various provisions of the Dodd-Frank Act and the JOBS Act prior to their adoption. It is no surprise then, that the SEC has largely ignored the rulemaking timelines proscribed by the Dodd-Frank Act and the JOBS Act in deference to its historical rulemaking processes.
The specific SEC mandates under the Dodd-Frank Act and the JOBS Act demonstrate a theoretical erosion of the regulatory independence of the SEC. With the establishment of the Financial Stability Oversight Council (the "FSOC") pursuant to Title I of the Dodd-Frank Act, Commission Gallagher observes that "the threats to the [SEC's] independence move from the theoretical to the immediate."
The FSOC is a regulatory panel consisting of ten members, including the heads of nine federal agencies, including the SEC, CFTC, FDIC and the Treasury Department. Commissioner Gallagher notes that the FSOC "is composed not of agencies, but the individual heads of agencies, acting ex officio." Commissioner Gallagher argues that "already in its short existence, this new body has directly challenged the [SEC's] regulatory independence. It is also where just one member of the SEC, the Chairman, can defend that independence…. As I have said in the past, the structure of FSOC is particularly troubling for an independent agency like the SEC. While the Secretary of the Treasury and the heads of the FHFA and the CFPB may speak on behalf of their agencies — not to mention the President that appointed them — the same cannot be said of the Chairman of the SEC. To preserve its independence, Congress created the SEC as a bipartisan, five-member Commission and gave each Commissioner — including the Chairman — only one vote. This means that the Chairman has no statutory authority to represent or bind the Commission through his or her participation on FSOC. Yet as a voting member of FSOC, the Chairman of the SEC does have a say in authorizing FSOC to take certain actions that may affect."
As the SEC and its staff continue the deliberative rulemaking process without regard to the timelines mandated by the Dodd-Frank Act, it will be interesting to see whether Congress takes further action and how the SEC reacts to FSOC actions regarding the federal securities laws.