How “Independent” Are Independent Agencies?

floyd norris lawfuelFloyd Norris writes the NY Times’ ‘High and Low Finance’ section in the Friday edition.

In 1985, President Ronald Reagan had to fill a Democratic slot on the Securities and Exchange Commission. He chose a young lawyer and economist, Joseph A. Grundfest.

He did not have to look very far to find Mr. Grundfest, who is now a law professor at Stanford. “At the time,” Mr. Grundfest recalled this week, “I was working in the Reagan White House as counsel and senior economist at the Council of Economic Advisers.”

Under the law, no more than three members of the S.E.C. can be from the same party, so the seat had to go to someone who was not a Republican. Mr. Grundfest was a registered Democrat. The fact that he was serving in a Republican administration did not disqualify him, and he easily won Senate confirmation.

This year, two new members of the S.E.C., one Democrat and one Republican, have been confirmed by the Senate and are about to be sworn in. They were each nominated by President Obama. But the reality appears to be that he did not really choose them.

Instead, they were effectively chosen by senior senators. Both the Republican, Michael S. Piwowar, and the Democrat, Kara M. Stein, were aides on the Senate Banking Committee. It appears that their former bosses, Senator Michael D. Crapo of Idaho, the ranking Republican on the committee, and Senator Jack Reed of Rhode Island, the former chairman of the Subcommittee on Securities, Insurance and Investment, were instrumental in their selection.

That helps to explain why the S.E.C. has in recent years splintered into factions far more than ever before. “They tend,” said Arthur Levitt, the chairman of the S.E.C. from 1993 to 2001, “to embrace the philosophy of their mentors.”

I asked the Democrat whom Mr. Grundfest replaced, Bevis Longstreth, how he was chosen. The answer had nothing to do with a senator. In 1981, Mr. Longstreth, a partner in Debevoise & Plimpton, a New York-based law firm, knew James A. Baker III, President Reagan’s chief of staff at the time, who shepherded his appointment through the process.

Another former commissioner recalled never having talked to anyone on Capitol Hill before being nominated.

Of course, members of Congress always had influence, and presidents have sought advice and engaged in horse trading. But Harvey Pitt, who worked on the S.E.C. staff from 1968 to 1978, rising to general counsel, said things had changed by the time he returned as chairman in 2001. By then, he said, presidents were expected to nominate the people chosen by the opposition party’s senior senators, unless there was something clearly wrong with the person.

Mr. Pitt said he thought that began on a more formal basis after the Republicans took control of Congress in 1994, when Bill Clinton was president.

Mr. Pitt, who was appointed chairman by President George W. Bush, said that his recommendations and approval were sought by the White House for prospective Republican commissioners, but that while he met with Democratic choices before they were nominated, he did not feel he — or the White House — had much leeway in choosing whether to appoint them.

Now, there is some evidence that the president generally gets to choose the chairmen of independent commissions, but the other majority members are picked on Capitol Hill.

The result has been that chairmen of commissions can find it difficult to accomplish anything. Last year, Mary L. Schapiro, the chairwoman of the S.E.C. at the time, tried and failed to push changes in money market funds through the commission in the face of strong opposition from the money market fund industry. She could not get the Republican votes, and one of the Democrats on the commission also refused to go along.

That infuriated other financial regulators. The Financial Stability Oversight Council, composed of 10 top regulators including the S.E.C. chairman, looked for ways to force actions it thought were needed to assure such funds would not need federal support during a crisis, as happened in 2008.

Read more at the New York Times Here

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