By Jerri-Lynn Scofield, who has worked as a securities lawyer and a derivatives trader. She now spends much of her time in Asia and is currently researching a book about textile artisans. She also writes regularly about legal, political economy, and regulatory topics for various consulting clients and publications, as well as scribbles occasional travel pieces for The National.
The Wall Street Journal ran a short article yesterday, As Seats Go Unfilled on Federal Panels, Businesses Face Uncertainty, discussing the problem many businesses face– regulatory uncertainty– due to failure to fill many seats on regulatory commissions.
The article devotes much space to the Federal Trade Commission (FTC), which, uniquely in its 102-year history, has only two of five commissioners seated. According to the WSJ:
“The design of the FTC doesn’t contemplate three vacancies,” said Jon Leibowitz, a former FTC chairman who is now a partner with Davis Polk & Wardwell LLP. “A lot of companies are trying to sort through how to deal with a two-person commission.”
Last Friday, as expected Trump withdrew the US from the Paris Accord– making good on a campaign pledge to reverse this highly visible symbol of his predecessor’s professed commitment to aggressive policies to arrest climate change (I leave aside as beyond the scope of this post any discussion of whether this position was mere rhetoric). Trump and Congress have also the Congressional Review Act (CRA) to roll back ‘midnight’ rules– which are measures passed during the waning days of the previous administration, as I discussed in these two posts, Republicans to Use CRA to Roll Back ‘Midnight’ Rules and Benefit Oil Companies and Trump and Congress Use Congressional Review Act to Roll Back 14 ‘Midnight’ Rules; More to Follow?. These policy reversals are upsetting prior plans and commitments businesses have made, in anticipation of certain rules or policies being enacted as adopted.
As the WSJ reports, day-to-day policy-making at many regulatory agencies has ground to a halt– as they lack the necessary minimum number of commissioners to conduct their affairs. In addition to the situation at the FTC, three of five seats are also unfilled at the Commodity Futures Trading Commission (CFTC) and Federal Energy Regulatory Commission (FERC). Two of five commissioner positions are vacant at the Federal Communications Commission (FCC), the National Labor Relations Board (NLRB), and the Securities and Exchange Commission (SEC). As the WSJ summarizes:
Similar stories are unfolding across official Washington, as the unexpected election victory by President Donald Trump and a slow transition process added to the usual disruption triggered when power changes hands. While some of the positions were unfilled even before Mr. Trump took office, left open by tradition for the next president to fill, they could remain empty for more months, making 2017 a year of prolonged uncertainty for businesses eager for clarity from regulators.
Packing Not Permitted
In contrast to the system for filling vacancies in federal judgeships, the design of the relevant authorizing statutes does not permit dominance by one political party to result in the packing of these commissions with a unanimous slate of commissioners who share the same party affiliation. Generally, no more than three (out of five) seats can be held by members of any one political party, and the tenures of each appointment are staggered.
This system is supposed to allow for a certain continuity between policy-making, in spite of who holds the White House and which party holds control of each house of Congress. But when positions are unfilled, the result is stasis.
Securities and Exchange Commission
In the case of the SEC, the new chair, Jay Clayton, a former partner at the white shoe firm Sullivan & Cromwell, confirmed by the Senate last month, in a largely partisan vote. The agency had been operating in slo-mo at least since outgoing chair Mary Jo White announced her departure in November. I discussed her legacy in Mary Jo White Leaves Behind a Weakened SEC for Trump to Weaken Further. On the regulatory side, Clayton plans to facilitate capital formation, as he discussed in first first public statement as SEC chair, according to this piece, SEC Chair Jay Clayton Tells ACSEC Members Capital Formation will be Priority During His Tenure, published last month by Crowdfunding Insider:
Facilitating capital formation is one of the central tenets of the SEC’s mission and it is a focus that this committee and I share. One of my priorities is for the Commission to focus on facilitating capital-raising opportunities for all companies, including, and importantly, small- and medium-sized businesses. Doing so will not only help those companies, but it also will provide expanded opportunities for investors, help our economy grow, facilitate innovation, and further job creation.
As I mentioned during my confirmation hearing, I understand the many challenges facing small- and medium-sized businesses, as well as the importance of those businesses to our local economies and, collectively, our national economy. I appreciate your willingness to share your knowledge and insights about smaller and emerging companies and the challenges they face.
Astute readers will point out that this passage is largely boilerplate and is very vague. At the moment, neither Clayton nor his staff has laid out any more comprehensive guide to his thinking. But whatever the case, even if he has a clear idea where he wants to agency to move on this issue, activity is currently stymied due to missing commissioners.
Two of the remaining SEC seats have been vacant for more than a year. SEC commissioners serve for five years, and are staggered, so that each year on June 5, one commissioner’s term expires. A commissioner can serve an additional 18 months after expiration of his/her term if a replacement has not been appointed; not more than three commissioners can belong to the same political party, according to the SEC’s website. Yet at the moment, until at least one more SEC commissioner is seated, any of the three current commissioners can effectively block any business from proceeding, because approval of three commissioners is necessary for any vote to occur on new rules.
On the enforcement side, I should mention, how vigorous an approach the agency will take on enforcing the securities laws is unsettled, and will wait on formal appointment of the next SEC director of enforcement, widely reported to be Sullivan & Cromwell partner, Steven Peikin, as I discussed last week in this post, Two Questions for the Next SEC Director of Enforcement. This is a typical state of affairs during the transition between one administration and another– and is thus not an example of especial lassitude on the part of Trump or his advisers. While Trump appears to thrive on chaos and disorder– and there’s no question that the transition has not been as seamless– to be fair, I should mention that Trump is often criticized for situations where his predecessors were given a bit of a pass.
The situation at the CFTC is even worse than at the SEC. As with the SEC, no more than three CFTC commissioners can come from any single political party; at the moment, three slots are vacant, according to the FCTC website. The sole sitting Republican CFTC commissioner, acting chair J. Christopher Giancarlo wants to dismantle swaps and other derivatives rules made in the wake of the financial crisis under Dodd-Frank authority, as discussed in this WSJ article, Trump Nominates J. Christopher Giancarlo as CFTC Chairman. Giancarlo was a vociferous opponent of the approach undertaken by his predecessor as chair, Timothy Massad. But any action will require waiting until more commissioners are confirmed, especially as the only other serving commissioner, Sharon Bowen, is generally not inclined to pursuing such a course of action.
Regulatory Rollback Deferred
The tardy approach to filling missing slots will certainly stymie any immediate roll back of the existing regulatory framework. Without a quorum of sitting commissioners, agencies cannot conduct business; even where there are three sitting commissioners, as is the case with the SEC, one commissioner can effectively block business from proceeding. That leaves existing regulatory projects up in the air, and in a state of uncertainty. And as I said at the outset, that makes it difficult for firms to structure their business in response to expected regulations, and plan accordingly.
Consider the fiduciary rule, about which Trump issued a January executive order directed the Department of Labor to conduct an examination of the rule, as I discussed in these posts, Fourth Federal District Court Looks Likely to Uphold Fiduciary Rule and Goodbye Fiduciary Rule? Department of Labor Delays Implementation Until June. Yet this order proved to be mere theater, with the rule set to go live later this week, on June 9, as discussed in this Barron’s piece, The Fiduciary Rule Goes Live at Long Last. One reason for this is that there is considerable lead time required for firms to comply with complicated new rules. Once firms have taken these steps, in anticipation of previously settled deadlines, they usually don’t want to scupper these efforts. They also became advocates of the new rules, lest they otherwise suffer a competitive disadvantage relative to firms that had not elected to comply.
Until major regulatory agencies– CFTC, FCC, FERC, FTC, NLRB, SEC– have a full bench of commissioners in place, it will be difficult for them to make any sweeping regulatory moves. Looking on the situation from a distance, I can’t say I see those chairs as being filled anytime soon, and as long as that’s the case, these agencies will merely be marking regulatory time– neither putting forward new regulations, nor dismantling existing ones.