At a conference last week, Mary Jo White expressed the frustrations she had of dealing with congressional interference in independent regulatory agency matters when she ran the SEC from April 2013 to January 2017 under the Obama administration.
One of the big problems, in White’s view, is the riders that members of Congress put in during the appropriations process to fund the agency’s operations. These provisions restrict what the SEC can do, for example, on a rulemaking.
“I am an executive-type, right? So, I don’t like Congress frankly dictating their rules,” White said at Northwestern University Pritzker School of Law’s Annual Securities Regulation Institute on January 24, 2022.
She explained that it is one thing that, for example, Congress tells through a law like Dodd-Frank to ask the SEC to write rules on certain matters. But it is entirely another thing for Congress to write those rules themselves. PL111-203
This means the agency must abide by the rules that make no sense at all when a cost-benefit analysis is carried out.
“I think Congress should stay in its lane,” she said. “But it is the reality of Washington that they have that power.”
During her tenure at the agency, a big source of contention was whether the SEC should write a rule that would require public companies to disclose its political expenditure.
After the Supreme Court allowed corporations to spend freely on political activities in Citizens United v. Federal Election Commission, ethics and advocacy groups supported a 2011 petition by 10 law professors to request the SEC to write a political spending disclosure rule. The groups in the ensuing years encouraged more than 1.2 million people and groups to submit comment letters in support of the rule.
Businesses opposed the rule and lobbied heavily against any action on it by the SEC. In their view, a disclosure rule about political spending violates their First Amendment rights. Moreover, they said the information is not material to investment decisions. And they successfully got Republicans to put the rider in budget bills. Now, Democrats, in charge, took the rider out.
“Is it [a rider] a good idea? No, the independent agency should be allowed to carry out the independent expertise that would analyze all that, but that’s not how it works,” said White, who is a partner with Debevoise & Plimpton LLP in New York.
Moreover, Congress can easily cut the budget to hamstring the SEC. And she sympathizes with what current Chair Gary Gensler is going through, who will face a tougher congressional crowd next year if Republicans win one or both chambers of Congress during the mid-terms in November.
“They can exercise their clout by cutting resources,” White said. “It would be a shame because the SEC needs more resources, not fewer.”
Former SEC Commissioner Robert Jackson, who moderated the panel discussion, said that such authority raises a number of questions.
“One of the things that the chair has talked about is … that the headcount, the agency needs to make investments, and the prospects of losing some budget might be on Gary’s mind,” he said. “Would it be on yours if you were the head of the agency these days?”
Without a doubt, White responded, adding that she always used to emphasize to Congress about the lopsidedness in terms of the amount of dollars available for cybersecurity and put in place robust systems to oversee the markets.
“And there are things you just cannot do; you need to know you are going to have the funding in order to do long-term capital project in any space,” she said. “No question about that that can really limit severely what you can do.”
The SEC is asking for about $2 billion for fiscal 2022, which began in October last year, but the larger budgeting process has been stalled with disagreement on many other issues on the Hill.
Is Climate Change Disclosure Rule Doomed to Fail?
In the meantime, William Hinman, who headed up the Division of Corporation Finance (CorpFin) when White’s successor Jay Clayton headed up the SEC, pointed out another difficulty for the commission: the ability for Congress to review and disapprove relatively new rules rather quickly under the Congressional Review Act (CRA) with a joint resolution.
“That’s got to be something that he [Gensler] is thinking about right now,” said Hinman, a senior adviser with Simpson Thacher & Bartlett in Washington.
“We are going to have a new Congress potentially right on the heels of a final rule,” he said, referring to climate change disclosure rule.
President Biden has put priority on climate change, and the SEC staff has been drafting a proposal intended to increase the information that companies provide in a more consistent and comparable way. The proposal is likely to come out in March or April. By the time it is finalized, and it is in the rule books, Hinman said that a new Congress could set it aside.
Gensler is “trying to move quickly and the scope and how ambitious the rule’s going to be,” he added. “At some point, it’s going to be more and more evident that the final rule may have to survive scrutiny by the next Congress, one that could be very supportive of the rule or not.”
White agreed. Moreover, if Republicans control Congress, she said Gensler will probably have to make more frequent trips to the Hill both informally and formally.
In addition, “By putting a line in the budget approval process and the report, the commission could be prohibited from spending any funds and expending any resources on implementing climate change rules,” she said.
This article originally appeared in the February 3, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.
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