Current Executive Orders Don’t Apply to SEC, But Commission’s Independence is Far from Absolute

White House

The White House issued a series of Executive Orders and a Chief of Staff memorandum addressed to executive agencies and departments calling for a hiring freeze, a regulatory freeze pending administration review and a reduction in the number of current regulations. The SEC, as an independent agency, does not fall within the purview of these orders, but the agency is far from immune from congressional or presidential influence.

The SEC does not fall under the jurisdiction of any Cabinet department, and Congress identified the SEC as an independent agency in the Paperwork Reduction Act, 44 U.S.C. §3502(5). Unlike the heads of many administrative agencies, who serve at the pleasure of the President, its members are subject to presidential removal only for cause, in the case of inefficiency, neglect of duty or malfeasance in office. The Commission engages in both quasi-legislative and quasi-judicial functions, and the Executive Department lacks the authority to directly intervene in SEC operations.

As former Chair Mary Jo White stated in a recent speech, “for the SEC to be a strong market regulator, wiser from the experience of the financial crisis, we must be ready to use the full array of tools available to us—not relying on disclosure and enforcement alone . . . [a]nd we must do so with a fierce independence in applying our expert, best judgment to protect investors, to maintain fair, orderly, and efficient markets, and to facilitate the formation of capital by the companies whose innovation and growth drives the American economy.”

Both Ends of Pennsylvania Avenue

The SEC is subject to considerable influence from both ends of Pennsylvania Avenue, however. The most obvious source of White House influence is the authority of the president to appoint the SEC chair and its commissioners. Members of the Commission serve staggered five-year terms, so that its membership is not necessarily subject to change within one presidential term. However, due to the current Commission vacancies and the departure of former Chair Mary Jo White before the expiration of her term, President Trump will have the opportunity to dramatically reshape the SEC with the immediate appointment of a new chairman and two Commissioners. In addition, Commissioner Kara Stein’s term expires in June of this year. By statute, no more than three Commissioners may be of the same political party, but otherwise, the President has broad discretion in making his selections.

The Commission is also a creature of statute, and as such, its mission and powers are subject to statutory modification. It would, for example, be within the purview of Congress to restrict or eliminate the SEC’s controversial in-house administrative law judge program or to restrict the agency’s rulemaking authority, including repealing the statutory mandates for particular rules that are unpopular in the marketplace. For example, in January 2017, the House of Representatives passed H.R.78, the SEC Regulatory Accountability Act. This measure would expand the required economic analysis applicable to SEC rulemaking, and would require the agency to review all of its regulations every five years to “determine whether any such regulations are outmoded, ineffective, insufficient, or excessively burdensome.”

Congress and the President may also exert influence over the SEC through the budgeting process. For years the SEC has urged Congress to grant it self-funding status, but the requests have fallen on deaf ears. The agency deposits the fees it receives in the general Treasury account, and is dependent on congressional appropriations for its funding needs. Congress may effectively rein in SEC activity by trimming its yearly budget allocation.

Will the Supreme Court Play a Role?

A changing Supreme Court may also cause us to reconsider our basic assumptions on the nature of the SEC’s status as an “independent” agency and the protected tenure of its members. Most courts and legal scholars generally treat this conclusion as a given, and Congress appeared to nod its assent in the Paperwork Reduction Act designation mentioned above. The Exchange Act, the statute that created the agency, is silent on the question of independence or whether SEC commissioners are subject to removal by the president without regard to cause, however.

This is not surprising, given that Congress passed the Exchange Act while Myers v. U.S., 272 U.S. 52 (1926) was still good law. This lengthy and complex decision appears to suggest that Congress may not restrict the power of the President to remove appointees. A year after Congress passed the Exchange Act, the Supreme Court held in Humphrey's Executor v. U.S., 295 U.S. 602 (1935) that when Congress provided for the appointment of officers whose functions were of a legislative and judicial nature, rather than executive, and limited the removal grounds for these officers, the President had no constitutional power to remove them for other than the specified reasons. Congress never amended the Exchange Act to reflect this decision and clearly define the SEC as an independent agency or to state when commissioners may be removed.

This may appear to be a dusty debate for the history books and administrative law classes in law school, but a 2010 dissenting opinion by Justice Breyer may have breathed some life into the question. Justice Breyer wrote in a dissent to Free Enterprise Fund v. Public Company Accounting Oversight Board, 561 U.S. 477 (2010) that "it is certainly not obvious that the SEC Commissioners enjoy ‘for cause’ protection." He asserted that "[a]s far as its [the Exchange Act] text is concerned, the President's authority to remove the Commissioners is no different from his authority to remove the Secretary of State or the Attorney General." Justice Breyer did note, though, that the absence of a "for cause" provision was not necessarily fatal to agency independence, because independence was "a function of several different factors, of which ‘for cause’ protection is only one."

This language is significant because three other justices, including Justices Ginsburg and Sotomayor, joined Breyer in his dissent. The thrust of his dissent was that the PCAOB was properly constituted, and not the protected tenure of SEC commissioners. It is not clear whether the justices joining in his dissent subscribed to his characterization of the “for cause” removal requirement for SEC commissioners. Accordingly, it is premature to suggest that a change in Court membership would likely render SEC commissioners subject to removal at the pleasure of the President. It is worth noting, however, that the possibility exists as the makeup and ideological orientation of the Supreme Court shifts.