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Killing the SEC and other plans to redraft regulatory agencies

Joe Mont | August 23, 2017

Occasionally daydream about razing Washington’s regulatory agencies and starting from scratch?

The folks over at the Competitive Enterprise Institute apparently have. The public policy organization, “dedicated to advancing the principles of limited government, free enterprise, and individual liberty,” has released a series of one-page briefs that argue “for major, overdue reforms to the federal government’s sprawling regulatory bureaucracy” and suggest ways various federal agencies could be restructured.

 “Organizational change is hard. But it is not impossible. It requires adjusting the expectations and behaviors of an entire ecosystem of people—from employees to customers to vendors,” CEI’s introduction to the position papers says. “Perhaps the hardest change of all is in government organizations. With respect to regulatory agencies, we have reached the point at which nearly any effort to streamline is an improvement.”

“Fixing” the Securities and Exchange Commission is less preferable to CEI that outright eliminating it.

Originally, under the 1933 Securities Act, securities transactions were regulated by the Federal Trade Commission and applicable state agencies, the same as other business transactions.

However, the 1934 Securities and Exchange Act created the SEC, “which meant investors and entrepreneurs had to comply with a host of prescriptive mandates before offering shares of their businesses to investors,” the CEI paper explains, adding that “it is long past time to peel away the regulatory onion.”

CEI’s proposal is to abolish the Securities and Exchange Commission and “transfer its duties to police and punish fraud to the Federal Trade Commission.”

 “Because of the securities laws from the 1930s, there is more red tape surrounding the purchase of one share in a business than there is surrounding the purchase of the business as a whole. Incredibly, there is often more paperwork involved with a $100 transaction than there is with a $1 million transaction,” says. John Berlau, a senior fellow at CEI and author of the SEC proposal. “So-called ‘reforms’ such as Sarbanes-Oxley and Dodd-Frank haven’t modernized the securities laws at all. They’ve just added more rooms to an edifice built in the 1930s that now has a very shaky foundation.”

While all fraud should be punished swiftly, there should not be special rules in the name of preventing securities fraud, Berlau adds. “The same rules should apply to buying a share in a business as they do to buying the business as a whole. No extra red tape should apply to buying shares in a firm, simply because these shares are ‘securities.’”

Aside from transferring the SEC’s duties to police and punish fraud to the FTC, Berlau urged the Trump administration to make participation in the stock exchanges and their rulemaking body, the Financial Industry Regulatory Authority, voluntary for entrepreneurs and investors.

“Stock exchanges—including the New York Stock Exchange (NYSE) and NASDAQ—would no longer have quasi-governmental powers as ‘self-regulatory organizations’ through their jointly controlled FINRA, which answers to the SEC,” he says. “Instead, they would go back to being purely optional for listing securities, as they were for nearly 150 years before the creation of the SEC. Entrepreneurs selling pieces of their businesses could choose any venue they thought would be best to do this—whether NYSE or eBay.”

Environmental Protection Agency

CEI calls the Environmental Protection Agency’s budget “the most impenetrable of all federal department and agency budgets.”

“It is long past time to make the EPA budget at least as transparent and comprehensible as the budgets of other federal domestic agencies,” it says. “The Office of Management and Budget should work with the EPA to produce an intelligible budget.”

For years, the EPA “has warded off congressional oversight of agency policy making” by submitting a budget that fails to identify who at the EPA is spending the appropriation; how they are spending it; and pursuant to what statutory authority they are spending it, it says.

Another suggestion in the brief is that many of the EPA’s functions could be abolished, pared back, or transferred to other agencies without any negative effects on the nation’s environmental quality.

Specific recommendations:

  • Abolish the Office of Enforcement and Compliance Assurance and return its functions to the program offices;
  • Abolish the EPA’s 10 regional offices and transfer their emergency response capabilities into the Federal Emergency Management Agency;
  • Eliminate the Integrated Risk Information System program and fold its functions into the Toxic Substances Control Act program;
  • Eliminate all Healthy Communities and Smart Growth Programs and related grant programs;
  • Eliminate the Environmental Justice programs and related grant programs;
  • Eliminate the Environmental Education programs and related grant programs; and
  • Reform EPA science programs

Department of Commerce

The Department of Commerce’s mission statement is a charter for government interference in markets. It employs 47,000 people directly and spends about $8 billion annually on its mission to promote “job creation and economic growth by ensuring fair and secure trade, providing the data necessary to support commerce, and fostering innovation by setting standards and conducting foundational research and development.”

In practice, “this means the Department exists to reward businesses for following its favored policies,” CEI says. “It provides bailouts, handouts, and the spoils of redistribution. In effect, the Department of Commerce is a boon to rent-seeking businesses. That alone should be reason for its elimination.”

Among CEI's recommendations:

  • Merge the Census Bureau with other statistics agencies such as the Bureau of Justice Statistics and the Bureau of Labor Statistics to create a National Statistical Agency and privatize as many of these agencies’ functions as possible;
  • make the Patent and Trademark Office a performance-based organization under the Office of Management and Budget;
  • privatize the laboratories of the National Institute of Standards and Technology;
  • abolish the International Trade Administration and transfer its remaining duties to the U.S. Trade Representative;
  • abolish the Economic Development Administration and Minority Business Development Administration; and
  • transfer the Bureau of Industry and Security to the U.S. Trade Representative’s office.

Federal Deposit Insurance Corporation

Congress created the Federal Deposit Insurance Corporation during the Great Depression as a response to runs on banks that left many depositors without access to their money (as part of the 1933 Banking Act, better known as Glass-Steagall).

“However, in return for confidence in the banking system, federal deposit insurance introduced a systemic problem of moral hazard—the incentive to engage in more risky behavior that results when adverse consequences are lessened by a third-party guarantee,” CEI says. “Banks are more likely to make risky investments knowing their customers’ deposits are guaranteed. Customers, meanwhile, are less likely to pay attention to banks’ business practices.”

Among the recommendations (beyond the stated, preferred route of abolishing the FDIC):

  • Reduce the FDIC’s incentive to over-supervise banks;
  • reduce the FDIC’s role in bank resolution;
  • end the Consumer Financial Protection Bureau’s participation on the FDIC’s board; and
  • end any CFPB role in bank supervision.

Consumer Financial Protection Bureau

Speaking of the CFPB, constantly under fire from Congressional Republicans, CEI also wants it abolished.

“In its current form, it undermines the constitutional principle of checks and balances,” the brief says. “If Congress wishes to establish an agency to oversee consumer financial issues, it should start again from scratch, acting in a manner that respects fundamental constitutional principles.”

Other recommendations:

  • Force the CFPB to appreciate the effects of its regulations on financial institutions by placing it under the supervision of a board consisting of officials from other federal financial regulatory agencies;
  • abolish the Bureau’s supervisory role and make it purely a regulatory agency;
  • revise the Bureau’s overly broad power over “unfair, deceptive or abusive acts or practices”;
  • drastically reform the Bureau’s handling of data; and
  • shut down the CFPB’s independent research program.

National Labor Relations Board

The National Labor Relations Board, the federal agency that oversees private sector labor relations in the United States, “has long outlived its usefulness,” CEI says.

Created under the 1935 National Labor Relations Act, it was intended to implement workplace regulations and resolve labor disputes. It has both a rulemaking and an adjudicatory role.

“However, the NLRB no longer operates as it was intended by Congress—as a neutral arbiter in labor disputes,” the CEI brief says. “Throughout the NLRB’s history, its partisan composition has depended on control of the presidency. The Board is composed of two Republican and two Democratic members, with a chairman from the president’s party. This has caused case precedent to flip-flop depending on which party holds the White House.”

This politicization of the NLRB and oscillation of Board policy “has eroded union and employer confidence in the institution, as uncertainty reigns among those regulated by the NLRB due to ever-changing Board precedent,” it adds

The key recommendation: eliminate the NLRB and transfer its rulemaking authority and election duties to the Department of Labor and its adjudicatory authority to federal district courts.

CEI’s recommendations were submitted to the White House Office of Management and Budget in response to efforts under President Trump’s Executive Order 13781, “Comprehensive Plan for Reorganizing the Executive Branch.”