Securities Regulation Daily Wrap Up, EXCHANGES AND MARKET REGULATION—Shadow SEC group argues in favor of agency independence, (Feb 24, 2025)
The blog post is one of the first by securities law scholars who plan to call out the Trump Administration when they believe it errs on SEC issues.
A group of legal scholars calling themselves “The Shadow SEC” has begun posting substantive critiques of the Trump Administration’s approach to the SEC. The group said it views recent developments, such as an executive order purporting to place independent federal agencies under the president’s direct control, as worrisome and has called on the administration specifically to maintain the SEC’s status as an independent agency. The group’s latest post appeared in The CLS Blue Sky Blog, which is published by Columbia Law School.
Seeking to uphold agency independence. The Shadow SEC consists of John Coates, John C. Coffee, Jr., James Cox, Jill Fisch, Merritt Fox, and Joel Seligman (Seligman is co-author of Securities Regulation - Loss, Seligman and Paredes, which is published by Wolters Kluwer, which is also the publisher of Securities Regulation Daily).
According to The Shadow SEC, American capital markets enjoy lower costs than other such markets, at least in part because of the structural design of the SEC and the SEC’s robust enforcement mechanisms. A key part of this structural design is the SEC’s degree of independence from direct presidential control.
“Commissioners have traditionally been understood to be independent so they can carry out Congress’ delegated legislative tasks, and all presidents have chosen to only lightly direct even the chair, respecting the Senate-confirmation process that has ensured that only truly expert and experienced individuals have occupied that role,” said The Shadow SEC. “Less experienced staff in the White House, neither known to the public nor vetted by the Senate, have not been given authority to direct the operations of the SEC’s staff in carrying out their Article I responsibilities.”
The group also noted that the SEC’s has a partisan balancing mechanism built into the SEC’s organic statute, which requires that no more than three of its five members be from the same political party (i.e., the president’s political party). The group further suggested that the staggard terms of SEC commissioners can provide for additional independence and continuity over time.
Independence in a financial regulator like the SEC, suggested the group, is important not only in times of economic crisis but also in more routine agency operations and regulatory practice because independence can lessen the political flip-flops that might otherwise occur. The Shadow SEC, however, suggested that the more the SEC’s independence is weakened, the more likely it is that future commissions will engage in more flip-flopping that could range beyond frequent changes to non-binding agency guidance documents that already sometimes occur with a change of administrations following a general election.
“In sum, the SEC’s independence has mitigated the unfortunate recent increase in partisanship at the SEC,” said The Shadow SEC. “Were the SEC to have its independence wholly destroyed – as the current White House apparently intends to attempt to do — it would inevitably increase sharply partisanship at the agency, not just in this administration, but in those administrations that follow. Rapid and sharp swings in policy would increase and spread. Today’s victors will predictably become tomorrow’s losers.”
Executive order primer. President Trump recently issued an executive order asserting what many might call an aspect of the unitary executive theory of executive power in which a president asserts that he or she alone has all of the executive powers potentially found in Article II of the U.S. Constitution. The executive order, for example, would require independent agencies to submit certain plans to the Office of Management and Budget for review and directs each of these agencies to create the position of White House Liaison. The executive order also states that only the president and attorney general may interpret laws and that their interpretations are binding on the agencies.
A Fact Sheet accompanying the executive order specifically mentions that the SEC would be subject to increased presidential control.
Moreover, the DOJ has issued multiple statements in recent weeks purporting to tighten the administration’s grip on independent agencies. In a widely-reported letter sent from DOJ’s Sarah M. Harris, Acting Solicitor General, to Sen. Dick Durbin (D-Ill), Ranking Member of the Senate Judiciary Committee, the department said it would no longer defend the constitutionality of for-cause removal provisions at some federal agencies with multi-member commissions. The Supreme Court’s 1935 precedent known as Humphrey’s Executor held that Congress may establish independent federal agencies with commissioners who are immune from being fired by the president absent a showing of cause. The letter to Sen. Durbin specifically mentioned the Federal Trade Commission (FTC), the National Labor Relations Board (NLRB), and the Consumer Products Safety Commission (CPSC).
Justice Department Chief of Staff Chad Mizelle also issued what appears to be a blanket statement asserting that multiple levels of tenure protection (i.e., for cause removal protection) renders all administrative law judges (ALJs) unconstitutionally appointed.
That conclusion had been made on a narrower basis in a Supreme Court opinion that held that the SEC’s ALJs were not properly appointed under Article II’s Appointments Clause because they are officers of the U.S. It has been an open question how much farther that holding applied. As former Justice Breyer noted in a dissenting opinion in a case upholding the Public Company Accounting Oversight Board’s structure (but not its dual tenure protections), stripping away protections for ALJs could put at risk some very large in-house adjudicatory operations (See Appendix D of dissenting opinion, listing criteria that suggest agency independence).
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