Elections have consequences, as the saying goes.
We’re watching those consequences play out over the future of two regulators that came under attack from former President Donald Trump: the Public Company Accounting Oversight Board (PCAOB) and the Consumer Financial Protection Bureau (CFPB).
President Joe Biden and Democrats are now moving to strengthen the PCAOB and CFPB with new leadership, purpose, and funding, ironically using many of the same tactics Trump and the Republican Party used to attack them.
In both cases, the green light to swap out leadership at the will of a new administration was enabled by Supreme Court decisions on each agency’s constitutionality.
No federal agency is truly immune from politics. Their budgets are set by the president and Congress, politicians all. In many cases, agency leaders are appointed by the sitting president and confirmed by the Senate. But when Trump shattered norms and crossed lines as perhaps the most unconventional president in history, he opened the door for Democrats to do the same.
Should it come as a surprise to anyone they are using Trump’s behavior as an excuse to press their political agenda on two agencies that are supposed to be independent?
Remaking the PCAOB
Under Trump, the PCAOB had been criticized as becoming “feeble” and “neuter[ed].” In a lawsuit, former Chairman William Duhnke III was quoted as calling the PCAOB a “frivolous organization”; he believed it should be combined with the Securities and Exchange Commission (SEC), which oversees it. The Trump administration proposed folding the PCAOB into the SEC as part of a 2020 budget proposal, but the move was halted in Congress.
The SEC, led by Chair Gary Gensler, removed Duhnke on Friday and announced it would replace every member of the board. Prominent Sens. Elizabeth Warren (D-Mass.) and Bernie Sanders (I-Vt.) had pushed the SEC to make the move and applauded when it was announced. Republicans, most notably SEC Commissioners Hester Peirce and Elad Roisman, lambasted the move as a “troubling precedent.”
But the precedent had already been set just over three years earlier by Republicans. In late 2017, under then-SEC Chair Jay Clayton, the entire five-member PCAOB board was swept away and replaced with new appointees.
Originally established in the Sarbanes-Oxley Act of 2002, the PCAOB was created to “oversee the audit of public companies that are subject to the securities laws, and related matters, in order to protect the interests of investors and further the public interest in the preparation of informative, accurate, and independent audit reports for companies the securities of which are sold to, and held by and for, public investors.”
The law ordered that PCAOB members be appointed to staggered, five-year terms, which was meant to prevent a new administration from replacing the entire board all at once. There’s no provision in the law that orders any of the PCAOB board members to be affiliated with a political party.
In 2010, the Supreme Court weighed in. The case was brought by a Nevada accounting firm that argued the organization’s structure was unconstitutional and that its members should be appointed by the president, not the SEC. The Supreme Court upheld the PCAOB’s structure as constitutional, only altering one provision of the board member appointment process: It allowed the SEC to remove members at will.
Successive presidential administrations have done just that, en masse. A PCAOB with Democratic leadership could lead to stricter enforcement, among other changes.
Remaking the CFPB
Similar to his stance on the PCAOB, Trump took aim at the CFPB, proposing to slash its budget by $110 million in 2021 and even further in subsequent years. Congress didn’t approve the cuts but had already been swinging an axe against the agency. Director Richard Cordray, who was embattled in leading the CFPB, resigned and was replaced by Trump staffer Mick Mulvaney.
Mulvaney had previously called the CFPB a “sick, sad” joke, a sentiment he affirmed in his confirmation hearing, and then proceeded to tear the agency down piece by piece from the inside.
The amount of penalties against companies levied by the CFPB decreased dramatically. The highest amount under subsequent Director Kathy Kraninger was in fiscal year 2019, with approximately $780 million in fines. Contrast that with the top year under Cordray—fiscal year 2014—with more than $4 billion in fines.
Under Kraninger, the CFPB was much more likely to offer no fine, or fines as low as a dollar, to settle enforcement actions.
The CFPB was established as an independent bureau within the Federal Reserve System, one meant to ”empower consumers with the information they need to make financial decisions in the best interests of them and their families.” The director was appointed to five-year terms, in an attempt to shield the position from political influence.
But once again, the Supreme Court thought otherwise. In a 2020 decision in the Seila Law case, the court upheld the CFPB’s constitutionality but ruled the process for naming and replacing its director was not. The court ruled the director can be replaced at will by the president.
At Biden’s request, Kraninger tendered her resignation on his Inauguration Day, despite being appointed to her five-year term in December 2018.
The CFPB is currently led on an acting basis by Dave Uejio, appointed by Biden, while the nomination of Rohit Chopra for the full-time role remains in legislative limbo.
The agency has already flipped its stance on how it assesses and punishes abusive practices in the financial services industry and is much more likely to establish a whistleblower program similar to the one administered by the SEC.