Effective and well-designed laws governing investment and financial markets are the single most important foundation for financial markets to allocate capital efficiently while providing optimal reassurance to investors and lenders.  Strong empirical evidence shows the United States has a lower cost of equity capital than comparable countries and that this lower cost is attributable in part to an institutional design that protects the independence of securities regulators and assures strong enforcement. In this memorandum, we set forth our views about the importance of the Securities and Exchange Commission and its institutional design, especially the role of independence that has long characterized its operations.  Our beliefs are also informed by our collective deep experience as former SEC staff, practitioners, and scholars devoted to the study of the federal securities laws.  Indeed, we celebrate here the fact that the success achieved worldwide by U.S. capital markets depends upon the regulatory certainty that U.S. securities laws have provided over the years. Put simply, lower cost capital is a major contributor to economic growth and depends on an independent SEC.

From inception, in explicit legislative text, the SEC was designed by Congress to be a bipartisan, expert, and independent agency.[1]  As with its predecessor (the FTC) and the Federal Reserve Board, the SEC was deliberately shielded by Congress from the full swings of partisan pressure.  The staff of the SEC report to a chair appointed by the current president and confirmed by the Senate, insuring full political accountability under Article II of the Constitution, subject to budgetary constraints set annually by Congress under Article I of the Constitution. At the same time, commissioners themselves have long been understood as having for-cause removal protection and have been balanced along partisan lines.  “To ensure that the Commission remains non-partisan, no more than three Commissioners may belong to the same political party.”[2]  They have been appointed to staggered terms and asked to perform quasi-legislative (specification of legislation through rulemaking) and quasi-judicial (adjudication of civil disputes, with limited administrative remedies) functions delegated by Congress under Article I of the Constitution.

The workable balance that exists between the current independence of its commissioners and the political accountability of the chair has enabled the Commission to achieve its statutory goals. The February 18, 2025, Executive Order (“Ensuring Accountability For All Agencies”) threatens this balance.  It would downgrade the significance of all federal administrative agencies and subordinate them to a combination of unnamed White House staff and the Office of Management and Budget (“OMB”), which is directed to “review independent regulatory agencies’ obligations for consistency with the President’s policies and priorities” and “adjust such agencies apportionment by activity, function, project or object, as necessary and appropriate to advance the President’s policies and priorities.” Being a commissioner of a significant federal agency was long a significant and prestigious position that attracted high caliber, experienced, and public-spirited persons who have many other opportunities to use their time for other ends. If commissioners are subjected to constant oversight and deprived of any real discretion, such persons would be unlikely to serve in the reduced role that the Executive Order contemplates. The Executive Order instructs OMB to review and reject key positions taken by the agency. An agency chairman would be required to “submit agency strategic plans” to the Director of the OMB “for Clearance prior to finalization,” adding a new, political chokepoint on regulatory change, including changes both to protect investors and enhance capital formation.  In such an environment, we doubt that persons of high talent and expertise would be willing to leave their current position for government service, or that the agency would continue to be able to respond effectively to changes in the capital markets or the broader economy.

The SEC’s independence has allowed it to resist both populist pressure to attack capital amid recessions and after crashes as well as efforts to weaken its investor protection through industry capture.  While its political accountability remains intact through the appointment by the president of the chair, the SEC also has built and preserves a degree of public confidence precisely because its specification and civil enforcement of the securities laws have not been fully subject to “flip-flopping” (alternating between distinct approaches to the same policy question) that can be driven by increased politicization and full political control of an agency whose tasks – the structuring and sustaining of complex capital markets – span decades.  Political differences have mattered – required disclosures have been added and trimmed over time, for example.  But the core of the legislative structure has remained durably intact across both business and political cycles.

The durability through administrations of a basic package of both protections and limits on those protections has allowed the United States to build and maintain the deepest and biggest capital markets in the world.  Investment depends on predictability.  Regulatory changes introduce uncertainty, and their effects are further confounded by the ever-present unpredictability of markets – even known variations, whether from unpredictability in inflation and interest rates driven by the Fed, or the basic requirements for capital-raising and deployment set by the SEC – equate to risk.  Risks flowing from basic legal design are systematic and cannot be diversified.  Systematic risk comes with a cost – to companies, entrepreneurs, and the American economy.  The independence and bipartisan design of the SEC has reduced that systematic risk and enabled investors to charge less for their capital than they would on a risk-adjusted basis.  Capital formation has had to overcome less of a drag in the United States precisely because of the independence and bipartisan nature of the SEC.

In the United States, the cost of capital is lower than elsewhere.  NYU Business School Professor Damoradan’s widely used valuation data, for example, currently shows the United States as having among the lowest equity risk premiums in the world.[3]  Consistent with this being driven in part by the importance and role of an independent SEC, Hail and Leuz 2004 find that “firms from countries with more extensive disclosure requirements, stronger securities regulation, and stricter enforcement mechanisms have a significantly lower cost of capital,” and Fraccaroli, Sowerbutts, and Whitworth 2020 analyze 43 countries from 1999 to 2019 to show that reduced political independence of financial regulators generally harms financial stability.[4]  Building on a foundation of independence, U.S. capital markets have grown ever larger over time, currently representing over $62 trillion in equity market capitalization – up $11 trillion in 2024 alone.  Concerns over the openness of U.S. regulation to initial public offerings were shown to be overstated by the record-breaking boom of IPOs in 2021.  Overall, nearly $100 trillion in assets are under management by U.S. financial advisors, and U.S. financial markets have the broadest and most diversified array of investment products of any country in the history of the world.

What would happen if the SEC in fact loses its independence?  Concentrated interest groups can be expected to pressure each new administration to change regulation in ways that might not be in the interest of investors and the public and that might not enhance capital formation.  Entrenched companies could seek to have the SEC build regulatory moats to prevent competition.  Parties seeking to avoid the rigors of the SEC’s disclosure regime may succeed in having that regime diluted and subject to expanded exceptions, making share prices less accurate and eroding the efficiency of the pricing of capital and distorting the manner in which U.S. firms are operated. Moreover, history has repeatedly reflected the development of new and complex investment products to which the SEC must respond with sufficient attention and sophistication to balance the costs and benefits of their market impact. If, instead, the SEC were directed to rely on political expediency, dispassionate and balanced responses would be displaced.

Genuinely bipartisan regulatory independence impedes the speed with which transient political demands channeled through ordinary politics can be translated into legal change.  Independence creates stability in the law-specifying process at the federal level.  It reduces the power of small but concentrated interest groups (of whatever stripe) to reshape its policies. Long-term constituents – individuals thinking about investments of their long-term savings, listed companies interested in their ability to pursue long-term projects, and trade groups representing durably significant components of the system of capital formation and investment – are better able to make their distinctive and varied voices heard in the SEC’s policy formation process.  If a president were empowered to remove and replace all of the commissioners in a single moment, as if they were ordinary staff of an executive agency instead of being (as they are) congressional delegates in an independent agency, the pressures of public anger during market crashes (or bubbles) would have an unrestrained channel for direct and dramatic change in policy.  This would undermine investment and the economy generally.

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.  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.  Bipartisan, removal-protected commissioners have given the SEC as a whole an ability to develop or maintain points of view that diverge from political sentiment as it may move over time, particularly in response to market bubbles or crashes or financial scandals.

This design has always remained subject to the political accountability of an elected Congress, which could alter the SEC’s legislative authority and duties at any time and only funds the SEC on an annual basis.  At the same time, the bipartisan, independent structure has permitted the SEC to carry out its charge to draw on their combined expertise to specify the details of the disclosure and other components of the securities laws, as required by Congress.  “Flip-flopping” has been confined to a small number of issues for which staff provide non-binding guidance.  Those issues, while not trivial, are not as fundamental to capital formation and investor protection as a range of other, more core regulations and policies.  Without full independence those more fundamental policies could become the subject of partisan attention and rapid change, raising the costs of capital and harming the U.S. economy.

In sum, the SEC’s independence has mitigated the unfortunate recent increase in partisanship at the 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.  Policy swings would increase in frequency and significance.  A world in which unaccountable junior and inexperienced staff inside the White House dramatically reshape laws and regulations at the core of American capitalism, with little input from industry, investors, or the public, will harm capital formation and fail to protect investors.  The SEC’s independence has proven to be invaluable over the last century.  It should be preserved.

ENDNOTES

[1] Securities and Exchange Act of 1934, Section 4 (“There is hereby established a Securities and Exchange Commission…. … Not more than three of such commissioners shall be members of the same political party, and in making appointments members of different political parties shall be appointed alternately as nearly as may be practicable. No commissioner shall engage in any other business, vocation, or employment than that of serving as commissioner, nor shall any commissioner participate, directly or indirectly, in any stock-market operations or transactions of a character subject to regulation by the Commission pursuant to this title. Each commissioner shall hold office for a term of five years and until his successor is appointed and has qualified, except that he shall not so continue to serve beyond the expiration of the next session of Congress subsequent to the expiration of said fixed term of office …”).

[2] SEC website (https://www.sec.gov/about/sec-commissioners).

[3] https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ctryprem.html.

[4] Luzi Hail and Christian Leuz, International Differences in the Cost of Equity Capital: Do Legal

Institutions and Securities Regulation Matter?, 44 J. Acc’t Rev. 485 (2004); N. Fraccaroli, R. Sowerbutts, and A. Whitworth, Does Regulatory and Supervisory Independence Affect Financial Stability? Bank of England Working Paper (2020).

This post comes to us from The Shadow SEC, whose members are professors Joel Seligman at Washington University School of Law, John Coates at Harvard Law School, John C. Coffee, Jr. at Columbia Law School, James D. Cox at Duke University School of Law, Jill E. Fisch at the University of Pennsylvania Law School, and Merritt B. Fox at Columbia Law School. Media inquiries: John Coates, jcoates@law.harvard.edu.