Trump faces tall order in turning tide of sluggish SEC bureaucracy
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The Trump administration is seeking to make big changes in federal financial policy, from repealing parts of Dodd-Frank to halting the Department of Labor (DOL) fiduciary rule. Yet it may not fully understand the resistance it will face from the permanent federal bureaucracy.

Certain actions the president and Congress can take require no cooperation from the independent federal agencies that administer most of federal financial services regulation. Congress already has passed and the president has signed Congressional Review Act bills striking down recently passed federal rules.

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These include the Securities and Exchange Commission (SEC) rule mandated by Dodd-Frank requiring public companies to disclose payments for extractive resources, such as oil and gas. Congress is working on identifying more candidates for rules to be removed using this method which avoids the lengthy process needed for an agency to repeal a rule itself. 

 

The president has several tools at his disposal to remove the Obama-era Department of Labor’s “fiduciary” rule loathed by financial advisors and Trump. The fiduciary rule declares that anyone providing advice to people holding retirement savings accounts must accept a fiduciary obligation to put the client’s interests first. 

Although this sounds good, the Obama administration turned enforcement of the rule over to the plaintiffs’ trial bar, which is a windfall for that Democratic party stalwart. Many advisers to retirement accounts announced plans to retire or were planning to cut back on services, particularly to smaller accounts, in order to guard against lawsuits.

In the case of this rule, the president has ordered a delay in its implementation. Now that the president has his labor secretary in place, I suspect the labor secretary and the Department of Justice will simply cease defending the many pending lawsuits seeking to strike down the rule. Then courts could grant the requested relief to get rid of the rule at a cost of little political capital for the administration.

When the new administration starts to change policy at the independent agencies like the SEC, it will find a permanent bureaucracy in place that will make change much more difficult. The president’s freedom of action at the SEC is vastly different than the Treasury, a cabinet department where he gets to appoint 300 employees.

At the SEC, the president only assigns the vacant commissioner seats. With the Senate's confirmation Tuesday of Jay Clayton for SEC chair, three seats are currently filled, while two vacancies remain. There can be no more than three commissioners from the same party.  

Regardless of the line-up, contrast the span of control at the SEC, where the president will appoint three people, with the Treasury Department, where he will appoint 300. The president’s three commissioners will be charged with changing policy at a more than 4,000-person agency. That will not be easy. The SEC’s structure does not allow many of the management tools available in the private sector.

The SEC chairperson and the union representing SEC employees have never been able to agree on a “pay for performance” system so managers can reward more productive employees with higher pay. On the other side, civil service rules and the collective bargaining agreement combine to present almost insurmountable obstacles to firing any employee.

Once SEC employees pass a two-year probationary period, they are the functional equivalent of a U.S. Supreme Court Justice, i.e., employed for life. In a world such as this, serious change is difficult to accomplish.

My recommendations for the new administration are to try to work with the existing bureaucracy to accomplish proposed policy changes. The permanent bureaucracy and the union have been at the SEC long before the Trump administration, and they will be there long after. If Clayton and the new administration take too combative a path with the bureaucracy, it will simply hunker down and resist change.

When I was at the SEC, I asked a senior official what would happen if he disagreed with a policy that management needed carried out. He noted that he would try to change the decision and if that failed he would try to undermine the policy until a new administration came that would change it. At least he was honest!  

With only three Republican commissioners atop a massive agency like the SEC, it is better to work with the bureaucracy to make them see that better policies will help more companies to go public in the U.S., which is one leg of the SEC’s three-part mission to “protect investors, facilitate fair and orderly markets and promote capital formation.”

If the new leaders work with the union and the existing people at the agency, I believe significant change is possible and would benefit U.S. capital markets. These markets are still the best and deepest in the world despite some Dodd-Frank rules that weakened them.

However, it is important that we strengthen those markets as U.S. capital markets are one of the remaining bright spots in the U.S. economy. A strategy of working together to make the SEC a better agency can fulfill that mission. A strategy of all-out conflict with the permanent bureaucracy will not.

 

Norman Champ is a partner at law firm Kirkland & Ellis LLP, former director of the Division of Investment Management at the Securities and Exchange Commission and author of “Going Public: My Adventures Inside the SEC and How to Prevent the Next Devastating Crisis.”


The views expressed by contributors are their own and not the views of The Hill.