When Lawmakers Demand SEC Lawlessness

Last week more than three dozen federal lawmakers—11 senators and 27 house members—sent an extraordinary letter to U.S. Securities and Exchange Commission Chairman Gary Gensler.

In it, the lawmakers demanded “robust enforcement” of the SEC’s informal climate-disclosure “guidance”—even as the agency fights an uphill court battle to salvage its recent climate-disclosure formal rule.??

These lawmakers need a refresher course in constitutional and administrative law.? They might learn (or relearn) that agency guidance is not binding, and therefore not enforceable.? Unless and until an agency formally adopts a legally binding rule—usually through the public notice-and-comment process required by the Administrative Procedure Act—private citizens and businesses are free to ignore the agency’s informal suggestions and finger wags.

The SEC apparently recognizes what these lawmakers either don’t understand or willfully ignore.? Otherwise, it’s hard to fathom why the agency devoted years of staff time and untold public resources to produce its 885-page climate-disclosure rule and push it through the painstaking notice-and-comment process—and is now scrambling to defend the rule’s legality in federal court.? If the SEC could have achieved its desired regulatory goals by enforcing informal guidance, you can bet it would have taken that shortcut.

It's bad enough when Congress shirks its principal constitutional responsibility by empowering unaccountable executive branch administrators to write binding laws that can put us behind bars.? The least we should demand is that administrators impose these edicts through formal, transparently promulgated rules—not informal suggestions in the form of agency guidance.

As explained by Columbia Law School professor Philip Hamburger, founder of the New Civil Liberties Alliance (where I currently work), agency guidance is among the most pernicious abuses of administrative power, which is saying a lot.? In his seminal treatise, “Is Administrative Law Unlawful,” Professor Hamburger described such guidance as a form “administrative extortion”—the use of under-the-table threats when agencies want to impose legislative commands they know they cannot openly adopt as formal administrative rules.? Encouraging agencies to go even further, using their enforcement powers to punish people who disobey such guidance, is appalling.

Sadly, this is not the first time that lawmakers have pushed the SEC to act irresponsibly or worse.? During a Senate confirmation hearing a decade ago, one of the signatories to last week’s letter urged two SEC nominees not to worry about prosecuting—and then refusing to settle—enforcement cases that might turn out to be meritless.?

“You don’t have to have a perfect record,” the lawmaker assured these nominees, as if bankrupting and destroying the reputations of a few people every now and then is an acceptable societal price to pay to ensure that no corporate misdeed ever goes unpunished.? “We can tolerate [that] sometimes you will bring someone to trial and you may not succeed, but you are out there trying.”

The SEC chairman should politely decline this latest call to lawlessness from Capitol Hill.? Whether it’s prosecuting innocent people or punishing them for disobeying agency guidance, Congress should be reining in unelected bureaucrats rather than emboldening their depredations.

Russell G. Ryan, a former assistant director of enforcement at the SEC,?deputy chief of enforcement at the Financial Industry Regulatory Authority (FINRA), and partner with the law firm King & Spalding LLP, is now Senior Litigation Counsel at the New Civil Liberties Alliance.

The opinions expressed by this author are his alone and do not necessarily reflect the views of his past or present law firms, colleagues, or clients. His articles and postings are solely for general information purposes and are not intended to be, and should not be, read or interpreted as legal advice.