By Andrew N. Vollmer
–Senior affiliated scholar with the Mercatus Center at George Mason University, former professor of law, general faculty, at the University of Virginia School of Law, former deputy general counsel of the Securities and Exchange Commission, and former partner in the securities enforcement group of Wilmer Cutler Pickering Hale and Dorr LLP.
The Securities and Exchange Commission (SEC) regulates the nation’s markets for stocks and bonds and has a long list of responsibilities. It could stay busy and productive tending to the areas that federal statutes designate for it, yet it expands into new areas and activities without proper congressional authorization. This is commonly called “mission creep,” a particular and recurring problem at federal agencies, said the Supreme Court.
An obvious example of the unjustified expansion of SEC powers is the proposal to require publicly reporting companies to disclose climate change risks. Congress gave the SEC power to require companies to disclose information about their securities, businesses, and financial performance. The SEC has already ordered elaborate disclosures on those topics, but Congress did not permit the SEC to duplicate its current disclosure rules with a special and parallel set of rules aimed solely at climate-related risks.
The proposed climate-change disclosure rules would also creep further into the way companies run their businesses. They would require disclosure of whether and how the board of directors and management discuss and manage climate change risks and how the company integrates those risks into its business strategy. These forced disclosures would inevitably interfere with the best judgment of companies on how to structure their decision-making and internal processes, which are rarely proper subjects of SEC rulemaking.
Another example of the SEC’s continued over-reach is its regulation of digital assets and crypto currency, which play a growing role in the financial system. Concerned with the large number of suspicious offerings of crypto currencies, the SEC’s position – without congressional approval — is that many digital assets are subject to securities regulation. Some features of some digital assets bear a resemblance to securities, but crypto also differs in fundamental ways and does not fit easily into the system for regulating securities. Throwing the blanket of securities regulation over digital assets might have deterred some questionable products but has also squelched innovation and denied the advantages of digital assets to consumers.
The SEC is supposed to be an expert administrative agency. Rather than extend its regulatory universe by seeing securities everywhere in the crypto currency market, it could have and should have declined to impose the securities regulatory regime and helped Congress create a more suitable approach that encouraged genuine innovation but protected consumers.
As a final example of creep, consider the SEC’s recent approach to rulemaking. In various technical areas that do not attract wide public attention, a majority of the SEC has proposed costly and burdensome rules without sufficient need or expected benefits and often over the dissent of other commissioners. The SEC recently proposed disruptive changes in the mechanics and pricing of transacting in mutual funds. It wants to intrude into the internal governance structure of companies that clear and settle securities trades by requiring them to have a majority of independent directors, have directors with a “diversity” of “perspectives,” and comply with the SEC’s views on board committees.
In a third proposal, the SEC seeks to defy a statutory definition and classify certain trading platforms as securities exchanges. The SEC is not able to quantify the benefits of its proposal and projects millions of dollars in compliance costs. The agency also acknowledges the risk that the regulatory burdens could raise entry costs for new financial technologies, stifle innovation, and damage the current ability of market participants to locate liquidity in illiquid security markets. In each of the three proposals, the SEC wants to expand its regulatory control but has not made a persuasive case because a problem does not exist or the costs of a proposed solution outweigh the likely benefits.
Mission creep at the SEC and other federal agencies is no trivial matter. It concentrates government power in a small group of unelected officials and usurps the role of Congress and democratic controls on law-making. It therefore risks arbitrariness and bad outcomes and infringes personal liberty without adequate procedural protections.