Has the SEC reached peak politicization?

When SEC Commissioner Hester Peirce turned off her monitor to make a statement during a March 21 open meeting, she said doing so would reduce her carbon footprint.

Peirce was referring to the climate-risk disclosure proposal the commission was considering. It was hard to tell whether she was trying to be funny because after her face disappeared from screen at the online meeting, she went on to deliver a 24-minute takedown of the measure.

The unusually long dissent seemed to be the culmination of Peirce’s resistance to the strong push by the SEC’s Democratic majority to advance regulation of environmental, social and governance investing. It also was an example of the Securities and Exchange Commission reaching peak politicization.

The SEC once was known for rulemaking that usually advanced with unanimous votes. Over the last decade or so, the political tension at the agency has risen along with the partisan rancor that has engulfed much of Washington, where the SEC is headquartered just a few blocks from the Capitol.

“I don’t think there’s any question that securities regulation reflects the context of a highly politicized partisan environment we live in now,” said Knut Rostad, president of the Institute for the Fiduciary Standard.

Whether a rule is promulgated with a 3-2, 4-1, 3-1 or 5-0 vote, it is a regulation on the books, and financial advisers and other market participants must comply.

But a rule that advances without unanimity — and with the kind of strong dissent displayed by Peirce on climate-risk disclosure and by former Democratic SEC Commissioner Robert Jackson Jr. on Regulation Best Interest — comes out of the commission as a weaker measure that could be challenged in court or earmarked for overturning when the SEC next changes majorities.

“When you have a bipartisan vote, it does suggest greater attention was given to all viewpoints, and that’s a hallmark of administrative law,” said Scott Kimpel, a partner at Hunton Andrews Kurth. “The bipartisan adoption of a rule is one way to make a rule more durable.”

If there’s instability in regulation due to shifting political winds, it can raise compliance costs, said Kurt Wolfe, counsel at Quinn Emanuel Urquhart & Sullivan. When new rules are approved, it can become a question of when to change your policies and procedures.

“Do you do that now or do you wait and see what happens?” Wolfe said. “You’re constantly doing this calculus to figure out what you’re going to do from a compliance perspective. It’s expensive and time-consuming.” 

REPUTATIONAL RISK

Another danger for the SEC of a political split in the business it conducts is reputational risk, Kimpel said. If the SEC’s stature diminishes, it could chip away at the faith in its ability to police financial markets and facilitate capital formation, two of its principal duties.

“More and more people are going to begin to question the legitimacy of the agency,” said Kimpel, who served as counsel to former Republican SEC Commissioner Troy Paredes.

But the agency also can gain credibility if it is seen as getting things done. SEC Chairman Gary Gensler is an aggressive regulator who has put dozens of items on the SEC’s priority list, including ESG oversight.

The commission voted 3-1 to release the climate disclosure proposal for a 60-day comment period. It was another of several split votes during Gensler’s first year at the head of the agency.

“Gary Gensler has an ambitious agenda,” Wolfe said. “He’s going to drive that agenda. He’s undeterred by 3-1 votes.”

Advancing regulation with as many votes as possible if not all of them is a necessity, said Micah Hauptman, director of investor protection at the Consumer Federation of America.

“In this climate, there’s little to no opportunity for common ground on policy,” said Hauptman, a former counsel to Democratic SEC Commissioner Caroline Crenshaw. “You have a choice — to get things done on a party-line vote or not to get anything done at all. While a unanimous vote is ideal, when it comes to the really hot-button policy issues, it’s unlikely there will be consensus across the commission.”

The commission currently consists of four members. Peirce is the lone Republican. Gensler, Crenshaw and Allison Herren Lee are Democrats.

The fifth member, Republican Elad Roisman, resigned in January. He didn’t give a reason, but it appeared that he didn’t want to serve in the minority of a commission where he was destined to be on the losing side of votes.

The partisan division is similar to the divided votes that occurred often under Gensler’s predecessor, former Chairman Jay Clayton, who led a Republican majority. The majority on the normally five-person panel reflects the party that controls the White House, even if the chairman is a political independent.

DIVERGENT VIEWS

Although some common ground exists between Gensler and Clayton on cryptocurrency oversight, the two chairmen have divergent views on ESG regulation. Clayton illustrated that difference in a high-profile way by co-authoring a Wall Street Journal op-ed with Rep. Patrick McHenry, R-N.C. and ranking member of the House Financial Services Committee.

Clayton and McHenry argued that the SEC was overreaching by setting climate policy, a job that should be handled by Congress. The article was published on the day the SEC voted to put the climate-risk proposal out for public comment.

“In my view, Jay Clayton was the most political chair in history,” Hauptman said. “That happens when you golf with the president.” He was referring to Clayton’s occasionally hitting the links with then-President Donald Trump, who nominated him as SEC chairman.

Perhaps the most prominent rule of the Clayton era was Regulation Best Interest, the broker standard that was promulgated on a 3-1 vote with Republicans in favor and the Democratic commissioner at the time — Jackson — opposed.

The partisan divide on investment advice standards began when then-GOP SEC Commissioners Kathleen Casey and Paredes wrote a dissent to an SEC staff report in 2011 that called for a universal fiduciary standard. They asserted the document did not include a proper cost-benefit analysis, among other criticisms.

“The Republican commissioners consistently argued against a meaningful, authentic fiduciary standard,” Rostad said. “The Democratic commissioners were consistently arguing in favor of a meaningful fiduciary standard.”

There was a Democratic SEC majority at the time Casey and Paredes wrote their dissent on the staff report. Kimpel said the pushback was another example of the SEC minority trying to get its views across.

“There was a real concern the report did not reflect the feedback of two commissioners,” Kimpel said.

Casey was a former Senate Banking Committee staffer who became an SEC commissioner. Several SEC members over the past decade have come from Capitol Hill. The nominees to replace Roisman and Lee, Mark Uyeda and Jaime Lizarraga, respectively, are both working in Congress.

“They bring some of their political experience to the commission and in some ways are continuing to fight the political battles they fought in Congress,” Kimpel said.

Although a political SEC is almost inevitable because of its structure, the panel does cast many 5-0 votes, especially on enforcement cases that are deliberated in private.

“A lot of commission votes that aren’t political don’t get a lot of attention,” Hauptman said. “The public doesn’t see when the commission is unanimous.”

But the SEC is rarely unified on big, controversial policies.

“The commissioners would be better served if they got back to the core principle of finding common ground rather than proceeding along party lines,” Kimpel said.