Politics Generally Have Little Impact on Core Regulatory Mandates
Apex regulators across mature global jurisdictions typically are designed to operate independently of political whim and influence. For example, the SEC is organized as an independent agency of the federal government, and many states (which are themselves independent in the application of state securities laws) have active investigative and enforcement powers as well. While we note that the SEC’s chairperson and commissioners are political appointees, and its annual budget is appropriated not from the fees or monetary penalties it levies, but rather by elected politicians who maintain oversight of the agency’s activities, the agency’s investigative and examination mandates are determined primarily based on the agency’s independent assessment of risks in the marketplace. By comparison, the UK’s Financial Conduct Authority (FCA) is independent and funded by its authorized firms, though its board is appointed by the HM Treasury. France’s banking and insurance supervisor, the Autorité de Contrôle Prudentiel et de Résolution (ACPR), is attached to the Banque de France but is operationally and financially independent of the central bank.
Although exercising budget and oversight powers may provide an avenue to influence the overall priorities of the agency, the fact is that in the U.S., politically driven mandates have little influence on the execution by the line personnel on the day-to-day execution of the SEC’s rulemaking, examination and enforcement mandates. While political changes may be inevitable, the core mission of the agency (investor protection, capital formation, and enforcement) remains unchanged across political administrations.
The tone of regulators can and does change with the political winds. From time to time, we have seen regulators around the world taking a more aggressive tone with the firms they regulate, such as when the previous CEO of the UK’s FCA in 2012 famously said the FCA would “shoot first and ask questions later.” Post financial crisis in the U.S., the SEC pursued for years a “broken windows” theory of enforcement, where the agency charged what some pundits argued were lower-level violations that did not directly result in financial harm to investors. On the flip side, we also often hear politicians bemoaning the effect of over-burdensome regulation on a particular sector with promises of a softer touch on regulation. Such changes in tone often take their cue from political shifts following elections.
A potentially bigger impact on the regulatory environment is the role of the judiciary, which can be influenced by election outcomes and political control over appointment of judges. For example, the U.S. Supreme Court and other federal courts have chipped away at the powers of the SEC’s in-house courts and the deference that federal courts have traditionally given to federal agencies to interpret their own rules with recent rulings that are increasingly sympathetic to plaintiffs who claim violation of various constitutional rights in actions involving federal agencies. A recent decision by a U.S. federal appeals court vacated in its entirety the U.S. SEC’s Private Fund Adviser rules, which had sought to bar preferential treatment, restrict certain activities and enhance transparency of private fund advisers, on the grounds that the SEC had exceeded its regulatory authority. On Oct 21, 2024, the SEC announced its 2025 examination priorities, emphasizing focus on rigorous valuations, commercial real estate, fiduciary duty, cybersecurity and the use of artificial intelligence (AI) for registered investment advisors and broker-dealers. These priorities align with global regulatory trends, reflecting a shared focus on enhancing the transparency, security and integrity of financial markets.
Even as regulatory priorities may alternate with changes in administrations or governments, examination and enforcement aggression has tended to remain constant, and the number of examinations, investigations and enforcement actions tends to increase, as does the amount of monetary and other sanctions. In sum, political administrations may change and geopolitical risk is always on the agenda, but in our view the promise of a lighter enforcement regime is fleeting. SEC enforcement actions, for example, have remained remarkably unaffected (measured by year-over-year increases in both the number of actions filed and the penalties obtained) through both Republican- and Democratic-led administrations—despite at times widely divergent views and approaches on regulation.
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