An SEC Desperately In Need of Housecleaning Gets a President Uniquely Positioned to Clean House

About twenty years ago, a Securities & Exchange Commission Enforcement (SEC) attorney in the New York office ignored the original allegations against Bernie Madoff during the same time period that attorney was also investigating Donald Trump for dubious claims. This fact has never been publicly disclosed. It is nevertheless emblematic of an agency that has historically both misdirected its resources and operated only under the control of career bureaucrats.

The SEC often asserts that it is an “Independent Agency,” and not part of the Executive Branch of government. The U.S. Constitution delineates only three branches of Government and accordingly, as the SEC is not in the legislative or judicial branches, it is an executive branch agency that reports to the President.

But often the SEC career staff does not accept this principle. In a stunning admission, the SEC’s Enforcement Director was recently asked about the presidential transition and smugly responded, “We don’t put pencils down and say ‘Well, let’s just wait for the new folks on the 10^thfloor.” How is it that the Enforcement Director can profess total disregard for the policies of the new Administration? That is the very definition of a “deep state.” There are over fifteen hundred active enforcement investigations and each and every one of them must be evaluated by the President’s new appointees regardless of how thoroughly the Enforcement Director dismisses the new administration’s policies and priorities.

Moreover, the SEC has often improperly used its authority to harass certain prominent individuals such as Elon Musk with protracted fishing expeditions and punitive subpoenas. The pursuit of the limelight only serves to enhance the employment prospects of the employees and does not further the critical mission of the agency. The SEC must ensure this behavior ceases immediately.

The SEC staff often responds vindictively when the markets devise innovative legal solutions to bypass onerous regulations. Instead of petitioning Congress to amend the statutes or availing itself of the public rulemaking process, the SEC engages in rulemaking by enforcement. The recent investigations into Special Purpose Acquisition Companies (SPACSs) that comply with the law as written but are frowned upon by the SEC illustrate this punitive enforcement mindset.

Similarly, the SEC must not encroach on the growth of the remarkable cryptocurrency markets unless the activity clearly falls under the Howey Test for what qualifies as a security. The SEC has more than enough fraudulent activity to investigate without adding cryptocurrency to its portfolio. Indeed, when the SEC overextends its mandate, it often provides false comfort to investors who then forgo their own rigorous due diligence.

The SEC is also fixated on utilizing the public company reporting process to promote its own activist environmental and climate agenda regardless of whether the information is material to the reasonable investor. It is entirely inappropriate to use the reporting process for public companies to compel disclosure of information germane only to environmental activists.

Control of the agency begins with control of the career staff.  All division and regional director heads must be appointed by the new Chairman and adhere to the agenda of the new administration. The SEC must also terminate the practice of delegating its subpoena authority to career bureaucrats to initiate investigations without prior specific authorization from the Presidentially appointed Chairman and Commissioners.

The SEC is a critical gateway for ferreting out, analyzing, and developing corporate fraud cases that are often referred to the Department of Justice (DOJ) for criminal prosecution. The SEC maintains a lower threshold of evidence than the DOJ to initiate investigations and to issue subpoenas. This authority must be used consistent with the Administration’s policy priorities, rather than at the discretion of career bureaucrats who seek to defy the leadership of the agency. The SEC must operate in tandem with the DOJ, to ensure the Administration’s priorities areimplemented and to ensure justice is served.

We may never know if the time and resources expended by the SEC to investigate Donald Trump caused the attorney to set aside the allegations against Bernie Madoff. But we do know that the SEC Chairman and Commissioners must implement President Trump’s agenda and reform the agency that has historically reported only to itself.