Concerned that the Securities and Exchange Commission is in danger of losing its traditional independence, Commissioner Daniel Gallagher is blaming the Dodd-Frank Act and creation of the Financial Stability Oversight Council for the threat.

During a speech last week at the Practising Law Institute's annual “The SEC Speaks” conference, Gallagher began by offering a historical note. It was originally intended that the Federal Trade Commission would administer the Securities Exchange Act of 1934. Congress ultimately, however, decided that an independent, bipartisan agency with a high level of technical expertise in securities matters was warranted and the SEC was created. Its core attribute of autonomy, however, is now threatened by a “constant stream of external influences.” 

Congress has traditionally provided the Commission with considerable flexibility to exercise its expertise and authority and avoided imposing “minutely detailed mandates,” Gallagher said. In the post-financial crisis regulatory environment, all that is changing. The Dodd-Frank Act, which contains approximately 400 specific mandates, around 100 of which apply directly to the SEC, are highly prescriptive and the Commission faces a demand to issue highly technical rules under all-too-short deadlines, he said. This limits its flexibility, while occupying time and resources that could be better spent fulfilling other responsibilities.

Gallagher's plea to fellow Commissioners is to push back.

“Although the Commission continues to stare down an overflowing plate of Dodd-Frank mandates in addition to its other responsibilities… it must not allow itself to assume a secondary role in the regulation of matters squarely within its jurisdiction and core competencies,” he said. “This, I'm afraid, is exactly the role that the Commission has taken thus far with respect to critical initiatives.”

Among those initiatives is the Volcker Rule, a prohibition on federally-insured, commercial banks engaging in proprietary trading and sponsoring or investing in hedge or private equity funds. Gallagher says the SEC, required to work cooperatively with banking regulators and the Commodity Futures Trading Commission, has “taken a back seat” throughout the rulemaking process, even though many of the specific activities to be regulated fall firmly within its core competencies. “For this rule to get done, and get done properly, the SEC must take a leadership role,” he said.

Gallagher also cited what he sees as the threat posed by the Financial Stability Oversight Council. Created by the Dodd-Frank Act, the goal was to respond to a lack of communication and information-sharing among regulators. While this may be a worthy intent, he nevertheless thinks it shifts the discussion of threats to the SEC's independence “from the theoretical to the immediate.”

The FSOC is composed of the individual heads of regulatory entities and while the Secretary of the Treasury and [others] may speak on behalf of their agencies, the same cannot be said of the chairman of the SEC, Gallagher said, emphasizing that each SEC commissioner, including the chairman, has only one vote. “This means that the chairman has no statutory authority to represent or bind the Commission through his or her participation on FSOC,” he said. “Yet the chairman does have a say in authorizing it to take certain actions that may affect—and have already affected—markets or entities that the Commission regulates.”

To further complicate matters, the FSOC's mandate is to identify systemic risks and emerging threats to financial stability. The SEC, however, is not, by statute, a safety and soundness regulator and markets it regulates “are inherently risky, and with good reason,” Gallagher said. “Our mission is not, and should not be, to make these markets risk-free, nor is it to preserve the existence of any particular firm or firms.”

Congress provided FSOC with the authority to recommend that a primary financial regulator, such as the SEC, apply new or heightened standards and safeguards for systemically significant financial activities or practices. “It is immensely troubling then to think of the FSOC as an institutionalized mechanism for one set of regulators to pressure another in the latter agency's field of expertise— yet that is exactly what is happening,” Gallagher said.