A group of six prominent law professors have come together to form a Shadow SEC to monitor President Trump’s downsizing of the Securities and Exchange Commission.
With more than 600 SEC staffers taking a buyout offer of $50,000, the staff is down 12 percent to 4,400 – and that’s before the rumored mass layoffs.
“With growing concern, we fear that we are watching the SEC face a death by a thousand cuts,” the Shadow SEC said in a statement released last week. “No, we do not mean that the SEC is likely to be abolished by either executive or legislative action – although the Department of Education is facing just such a prospect. Rather, we mean that the SEC is on the verge of being shrunk by both budget cuts and mandated staff reductions, while it is losing its traditional independence – as an Executive Order now requires any policy decision to be approved in advance by the Office of Management and Budget. The end result might be a shell of its former self, as the SEC becomes an agency with little power, capacity, or independent judgement.”
The six law professors who make up the Shadow SEC are – Columbia Law Professor John Coffee, Harvard Law Professor John Coates, Duke Law Professor James Cox, Pennsylvania Law Professor Jill Fisch, Columbia Law Professor Merritt Fox and Washington University Law Professor Joel Seligman.
How was the Shadow SEC formed?
“Joel Seligman is the person who came up with the idea,” Professor Coffee told Corporate Crime Reporter in an interview last week. “It’s modeled after the shadow body that oversees the Open Market Committee and the Federal Reserve. They comment on whether the Fed has made a wise choice in raising or lowering interest rates.”
“We intend to be a non-partisan group of recognized experts in the field and try to give non-partisan empirical research that may inform the question about what’s going on.”
“We thought we’d be doing this about issues of considerable importance such as climate change or the regulation of crypto. But having set it up, we found that we actually are dealing with an existential threat to the SEC. The SEC can’t tolerate many layoffs and still function in anything like their former capacity.”
“We know that from the buyout process the SEC staff has already been reduced by about 12 percent and that’s before there have been any layoffs. So if there are layoffs, we might find the SEC could be down by as much as half or more, and by doing that we are threatening the existence, or at least the functionality, of one of our most successful administrative agencies.”
The Shadow SEC put out an article last week titled – The Value of an Independent SEC. The head of the Office of Management and Budget embraces a theory called the unitary executive theory. It’s a Constitutional law theory according to which the President of the United States has sole authority over the executive branch. That undermines what the Shadow SEC is arguing for – an independent SEC – an agency independent of the President.
“This unitary executive theory was pretty much drawn up by conservative law professors and the Federalist Society about ten years ago,” Coffee said. “It has gained some support from the Supreme Court. They did accept the theory with respect to commissions that had a single commissioner, on the theory that if there is only one commissioner, you are going to need to have the President have some authority over that commissioner or he’ll be outside the control of the executive branch.”
“I can accept that. But what Congress has done with several agencies like the SEC, the Federal Trade Commission and others is try to get some balance. While the President will appoint a majority of the commissioners, there will be some commissioners from other parties. And no more than three out of five can be from the President’s party. That’s an attempt not to deny the President authority, but to try and give both parties some role and some knowledge about what is going on at this particular agency.”
What impact will an SEC beholden to the White House, as opposed to an independent SEC, have on the markets?
“If you don’t believe the SEC plays a very valuable role, or you are angry because you have previously been sued or penalized by the SEC, you may have a grudge or a grievance and you may try to reduce it to relative insignificance.”
“Now we know that so far, the buyouts have largely depleted the senior staff of the SEC. The people who are taking the buyout and resigning are not young, entry level workers, but people who have been around for a long time and who probably anticipated that they would be fired so they might as well take the offer of the $50,000 payment.”
“That means that already we have seen an agency that has lost much of its senior top layer. And at some point, you are going to lose the institutional culture and memory. The SEC might have four people expert in one topic. And it might be that three of them have already resigned. And in a while, we are going to have no one there at the agency who has the expertise that the SEC used to have in great depth.”
Isn’t it true though that every time there is a new administration, there is a loss of top level executives who get replaced by the President’s people and senior staff that they bring along?
“I agree there are a fair number of important changes that occur on every change of administration. And people do bring in sympathetic staff. But that’s not entirely how the SEC runs. There are many people at the SEC who are experts in one area – broker dealers, investment management – and they can’t be easily identified as this party or that party.”
“The Chairman usually does want to have a staff of loyalists around him with whom he can plot policy and strategy. That doesn’t mean that people who administer the SEC are all political zealots associated with one party or the other.”
How do you compare the attack on the SEC with these buyouts and layoffs to the sledgehammer approach the administration is taking with the Consumer Financial Protection Bureau (CFPB), where they are outright seeking to shut it down?
“They are trying to shut down the CFPB. But the business community realizes that they need the SEC to resolve all kinds of issues. There are lots of complicated areas where there is a federal statute, there is private litigation, and plaintiffs can sue you. And you would like to get some direction from the SEC – an SEC no action letter, or an SEC approval or registration statement means something. And if you are in private litigation, you are in a better position if you have gotten the SEC to line up on your side.”
Have you seen any indication that the business community is coming to the defense of the SEC?
“Right now, major law firms are as scared as the SEC is. We have seen Paul Weiss and now Jenner & Block face severe reprisals simply because they took positions that were uncomfortable for the Trump administration.”
“I can understand why major law firms are keeping a low profile. As for major corporations, I don’t think they want to see the SEC decimated. But I also recognize that they believe that the last administration – with the SEC under Gary Gensler – regulated vigorously.”
“While I support Chairman Gensler, I recognized that many in the business community thought that was an excess of regulation.”
There is no indication that the Enforcement Division is being adversely impacted yet –
“But enforcement is down already. We’re into three months of the Trump administration. And the number of SEC enforcement cases is down from the first three months of the Biden administration.”
We did a story a couple of weeks ago about a group of SEC alums concerned about a change in policy at the Enforcement Division. Years ago, before the division started an investigation, they would have to take it before the Commission to get approval. Then more recently it went to – the Division could launch the investigation on its own, but then it had to go up to the Commission to get approval of a settlement. Now, under Trump it has reverted back to getting approval from the Commission to investigate.
That was an initial pullback.
“Let me summarize it this way. The prior administration did give greater discretion to the Enforcement Division to proceed on its own without a Commission vote. Not that they could settle the case or resolve it, but they could move forward in a number of ways, including seeking discovery. That has been reversed. It’s going back to an older position. That is within the range of discretion that might be justifiable because this is the way it used to be.”
“Other things are without historical precedent. I don’t think the idea of going after law firms has any kind of precedent that I can think of.”
There are many SEC alums who worked for these big corporate law firms who are also concerned about the attack on the SEC. But very few are speaking out.
“I haven’t seen them speaking out publicly. That’s probably because of the danger of reprisal. They may be exercising some influence trying to get the Senate, for example, to be a little bit more cautious about the ability to simply evaporate an agency. The worst example is the Department of Education which is for all practical purposes being abolished. Congress created that agency and the President alone is trying to abolish it. I find that a violation of the legislature’s role in our system of Constitutional governance.”
[For the complete Interview with Professor John Coffee, see 39 Corporatre Crime Reporter 13(13), March 31, 2025, print edition only.]