SEC’s Legal Losing Streak Beckons New Leadership at the Agency

COMMENTARY

Calls for the ousting of U.S. Securities and Exchange Commission Chairman Gary Gensler have been coming from all quarters these days. 

Rep. Wiley Nickel, D-N.C., a strong Democratic voice on the House Financial Services Committee, recently led a letter sent by 27 Democrats to the Democratic National Committee chair calling for a new SEC chairman. On the other side of the aisle, former President Donald Trump’s pledge to fire Gensler on day one, which was the highlight of his speech at a recent crypto conference in Nashville, Tennessee, was met with roaring applause.

It’s telling that even members of Gensler’s own party are calling for new leadership. The letter led by Nickel urged DNC Chairman Jaime Harrison and the prospective presidential candidates to select a new SEC chair “who takes a regulatory approach to digital assets that fosters innovation, secures American global competitiveness, promotes financial inclusion, and protects consumers.”

The bipartisan backlash is unsurprising. Since taking the agency’s helm in April 2021, Gensler has driven the SEC’s credibility into the ground with his relentless campaign to advance an unlawful, radical rulemaking and enforcement agenda. Several targets of Gensler’s progressive crusade have sought remedy in the courts, resulting in a series of embarrassing legal losses for this once proud agency. 

In June, the Fifth Circuit Court of Appeals ruled against the SEC in National Association of Manufacturers v. SEC, overturning Gensler’s hasty rescission of important provisions of the SEC’s 2020 proxy advisory firm rule adopted under former Chairman Jay Clayton. 

That ruling followed a previous decision by the Fifth Circuit in National Association of Private Fund Managers v. SEC, which struck down the SEC’s unnecessary and harmful private funds rule, concluding that the SEC “exceeded its statutory authority in adopting the Final Rule.” Similarly, a December 2023 ruling in the case of U.S. Chamber of Commerce v. SEC found the SEC had run afoul of the Administrative Procedure Act when it issued new rules on stock buybacks by not responding to the chamber’s comments during the rulemaking process and failing “to conduct a proper cost-benefit analysis.” 

Compare this to the tenure of Clayton, who pursued a thoughtful regulatory agenda rooted in solid cost-benefit analysis and a real understanding of how markets work. The result? During Clayton’s tenure, the SEC lost only one court challenge to his rulemaking agenda regarding a technical transaction fee pilot program that had been recommended by the agency’s own Equity Market Structure Advisory Committee.

The courts have also checked Gensler’s attempts to expand the SEC’s authority through enforcement. For example, a federal court recently dismissed much of the SEC’s case against SolarWinds Corporation, which was sued by the SEC after it fell victim to a Russia-backed cyberattack. The court held with respect to one of the SEC’s claims that the agency’s attempt to expand its statutory authority would “have sweeping ramifications” and “could empower the agency to regulate background checks used in hiring nighttime security guards, the selection of padlocks for storage sheds, safety measures at water parks on whose reliability the asset of customer goodwill depended, and the lengths and configurations of passwords required to access company computers.” 

And, this past May, the U.S. District Court for the District of Utah ordered the SEC to pay an embarrassing $1.8 million in legal fees for its “gross abuse of the power entrusted to it by Congress” after making misrepresentations to the court in connection with its request for a temporary restraining order, asset freeze, and other relief against blockchain company Debt Box.

One might think that racking up loss after loss would force Gensler to reevaluate his approach. But Gensler continues to show that satisfying his progressive benefactors is more important than carrying out the SEC’s statutory mission. For example, the SEC is currently defending its controversial climate change disclosure rule in court. As Clayton and Rep. Andy Barr, R-Ky., recently pointed out, the agency “doesn’t know how the energy transition will play out … and thus it has no grounds for setting mandatory standards for allocating capital.” 

Gensler is poised to push yet more misguided, radical policies in the second half of the year, including a second attempt at a laughable predictive data analytics rule that would kill technological innovation and investor choice.

One notable exception to Gensler’s aggressive rulemaking agenda is crypto. Despite repeated pleas from the industry for the SEC to provide clear guidance and a path to register tokens and platforms with the SEC, Gensler has instead pursued “regulation by enforcement.” Perhaps this should come as no surprise — it’s likely now impossible for Gensler to provide the regulatory clarity the industry has been requesting for years after he failed to detect the massive fraud at FTX, which could have been avoided had such clarity been provided in the first place.

In a recent “Thinking Crypto” podcast, Nickel also explained that, as Democrats hold their convention, he, Rep. Ro Khanna, D-Calif., and many other Democrats are pushing for a reset with the new Harris campaign because they believe Gensler is very much out of step with the 20% of voters who own crypto. The lawmakers say they are working to make these issues bipartisan.

There are few issues that both presidential candidates can agree on, but ending Gensler’s disastrous tenure at the SEC should be one of them. The SEC needs a leader with a forward-thinking approach that will restore confidence in the agency, strengthen U.S. markets and ensure retail investors are able to benefit from the opportunities ahead.

Barbara Comstock, former congresswoman, serves as executive director of the American Consumer & Investor Institute. She previously represented Virginia’s 10th Congressional District in the U.S. House of Representatives. She can be found here.