Regulatory Policy

SEC Unbound: Yet More Regulatory Creep

The seal of the U.S. Securities and Exchange Commission at SEC headquarters in Washington, D.C. (Jonathan Ernst/Reuters)
If the SEC has decided that it can regulate anything under the sun, what is to stop every other federal department or commission from realizing an equivalent opportunity to expand its authority?

Federal agencies like the Securities and Exchange Commission (SEC) have long varied in their focus and priorities, depending on their current leadership and the ideological composition of their members. In the Biden era, however, we may be seeing the dawn of a new age in the federal regulatory apparatus: one in which regulatory agencies, originally created and given their responsibilities by Congress, will begin implementing policies that are directly opposed to their statutory missions.

The SEC, as its website will inform you, has a multipart mission. It exists “to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation.” That mission has guided the commission since the 1930s, when it was founded in the aftermath of the market meltdown that had ushered in the Great Depression. While not without controversy, the creation of a new finance regulator was meant to do something specific: protect investors and allow markets to work. In the new age of environment, social, and governance (ESG) theory, those goals might come to rank second — if they are considered at all.

During a speech at the Center for American Progress last week, SEC acting chair Allison Herren Lee said that “human capital, human rights, and climate change” are “fundamental to our markets,” and that the demand for information about those topics “is not being met by the current voluntary framework.” She assured her audience that “our efforts at the SEC should and will stay firmly rooted in our mission,” but that statement was not at all consistent with the rest of her remarks.

Lee clearly has plans that exceed the agency’s traditional parameters, announcing that “the perceived barrier between social value and market value is breaking down.” The COVID-19 pandemic, racial-justice protests, and climate change all became linked in the last year, as “the issues dominating our national conversation were the same as those dominating decision-making in the boardroom.”

And lest anyone think this is a technocratic verdict that will affect only nerdy readers of corporate 10-K statements, MarketWatch also summarized the acting chair’s remarks on further mission creep, warning that her proposed disclosure rules would require further disclosure of political spending as well.

Commissioner Lee clearly believes that an SEC-mandated “comprehensive ESG disclosure framework” is consistent with the agency’s long-term mission. But even if we agreed with her, the people most highly motivated to advance ESG-style priorities will not be bound by any such constraints. Climate change, for example, is by far the single highest-profile issue in the ESG basket, and the climate activists’ long-term playbook — which will be strengthened and advanced by additional disclosure mandates and political-spending restrictions — is a direct threat to the SEC’s true mission.

Many “climate-finance” policies — such as requiring companies to limit their carbon footprint — aim to punish any company that has the temerity to continue using and investing in the traditional energy sources of coal, oil, and natural gas. The energy sources, that is, that power over 80 percent of the world.

That goal is no secret to anyone who has followed the world of climate-change politics. Much like the pacifist investors in the 1970s and 1980s who had hoped they could drive defense contractors out of business by starving them of capital through divestment campaigns, climate-disclosure advocates aim to push politically disfavored companies and industries into the economic dustbin, next to buggy-whip makers and VCR repairmen. The thousands of jobs already lost by the cancellation of the Keystone XL pipeline are just the canary in the soon-to-be-closed coal mine.

The people who laid down in traffic as part of the recent “Extinction Rebellion” protests in London and Washington, D.C., weren’t doing it so that ExxonMobil would issue a better corporate-disclosure statement. No, they did it in hopes of driving the big energy companies permanently out of business. And they’re not alone. The Green New Deal, championed by Representative Alexandria Ocasio-Cortez (D., N.Y.) and Senator Bernie Sanders (I., Vt.), would “transform our energy system to 100 percent renewable energy.” That doesn’t mean a few thousand fewer energy jobs, as the Keystone cancellation did. It means zero coal, oil, or natural-gas jobs, forever.

Perhaps future jobs losses from the Green New Deal and the collapse of the domestic energy sector aren’t the SEC’s problem. Or are they? We don’t all work in oil and gas, but we might all stand to lose a big chunk of our retirement savings when trillions of dollars of equity in energy firms and their customers and suppliers are vaporized.

Such a course of events might go a long way toward tackling climate change, but it clearly does not “protect” investors — and it is certainly not facilitating capital formation. It creates a political-protection racket in which, as Heidi Klum would put it, “one day you’re in, and the next day you’re out,” depending on public companies’ level of fealty to our newly super-empowered financial regulators. If the head of the SEC decides your company isn’t doing enough to end the climate crisis — or COVID-19 or racial injustice — you may be out, for good.

My Competitive Enterprise Institute colleague Marlo Lewis has written for years about environmental activists’ campaigns targeting energy companies. They claim to be guarding shareholder value from investment risks while creating and amplifying legal and political risks to those same shareholders. ESG campaigns such as fossil-fuel divestment are unlikely to ever be successful on their own, but it is alarming to see professional activists’ goals being adopted by federal regulators. Federal bureaucrats with market-moving powers may soon be able to unilaterally redefine their jurisdiction without review by Congress.

According to its acting chair, the SEC should be free to regulate on any topic that is part of the “national conversation.” From public health to civil rights to the environment, it is difficult to imagine an issue of any substance that would not qualify as an agency priority under such a justification. And if the commission has decided that it can regulate anything under the sun (or buried beneath the Earth’s surface), what is to stop every other department, commission, and federal board from realizing an equivalent opportunity to expand its authority? So far, no one has offered an answer.

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