The SEC’s Progressive Rulemaking Will Be Its Statutory Undoing

Proposed rules such as enhanced climate disclosures show that the agency is overreaching its congressional mandate in pursuit of a political agenda

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Over the past two years, the Securities and Exchange Commission (SEC) has radically shifted priorities. It has moved from its mission of protecting investors and maintaining fair, orderly and efficient markets toward the wholly political cause of supporting an environmental, social and governance (ESG) framework.

Some in Congress have tried to call attention to the problem, but SEC Chairman Gary Gensler, appointed by President Biden in 2021, has mostly stonewalled lawmakers. Even Gensler’s five-hour testimony before the House Financial Services Committee on April 18 did not explain the agency’s need to pursue controversial rules like its proposed enhanced climate disclosures, which would compel tens of thousands of public companies to disclose financial metrics and corporate activities that could conceivably foster climate change risks. The SEC’s focus on rules that control activities outside its purview shows that it’s time for Congress to rein in agency overreach.

Aggressive Agency Rulemaking

The new activist bent of the agency appears to come from a centralized, top-down power structure. With Gensler’s tenure of only two years at the SEC, his employees have proposed a record number of federal rules. So far, Gensler has overseen 53 new rules, which is twice as many as those of his two immediate predecessors, Jay Clayton (26) and Mary Jo White (23). In fact, Gensler’s SEC has already proposed the same number of rules that White oversaw during her entire four-year tenure. This increase in rulemaking is acknowledged by the agency itself. According to an inspector general report cited in the SEC’s 2022 Financial Report, “In only the first 8 months of 2022, the SEC proposed 26 new rules, which was more than twice as many new rules as proposed the preceding year.”

The agency now averages more than two rule proposals per month and has finalized many of these rules at the bureaucratic equivalent of a breakneck pace. SEC commissioners have scaled back the average time for members of the public to issue comments on proposed rules. Typically, an individual has 60 days to submit a public comment to a proposed new rule. But the SEC has shortened this period to 45 or even 30 days for many of its rules. The public has been granted 21% less comment time during a period when administrative rulemaking is proceeding 200% faster than normal. In other words, Gensler’s SEC is advancing twice as many regulations as usual on investors and public companies, while giving them less time to react.

Compounding this dilemma are many internal issues plaguing the commission. Under Gensler, workforce attrition at the SEC has leaped to its highest rate in 10 years. The inspector general report reveals that 6.4% of the agency’s workforce—or about 289 positions—were vacated in fiscal year (FY) 2022. Undaunted, the agency is pressing Congress to fund even more positions. The SEC recently requested funding for a total of 5,261 positions. That would be 454 more than the agency was granted in FY 2022, an 8.4% increase. Even if funded, it will be hard for the SEC to fill those jobs. The inspector general reports that the federal government takes on average 98 days longer, or twice as long, to hire new employees than private-sector employers do. This will place more burden on the SEC’s human resources department, its Office of Minority and Women Inclusion and senior management. The agency has taken 100 business days or more to fill positions 50% of the time.

Another problem with the SEC’s aggressive rulemaking is that rule-makers themselves often have insufficient time to weigh the consequences. Many of the agency’s major proposals over the last two years lacked substantive statutory justification and clear assessment of their financial costs. This criticism has been leveled at the agency’s climate disclosure rule, four-part equity market overhaul and its corporate political spending disclosure rule. During the recent hearing, House Financial Services Committee Chair Patrick McHenry charged that Gensler “failed to justify these significant rules with thorough evidence, careful studies, and even cost-benefit analysis.”

Read the full article on Discourse Magazine.