For municipal bond investors – and investors overall – an executive order signed Tuesday by President Donald J. Trump could erode confidence that the Securities and Exchange Commission will be willing to take action against “politically favored fraudsters.”
“One thing I would worry about if I was a muni investor is the possibility that the SEC would not be supportive of a case alleging fraud against a muni issuer that is politically aligned with the president, even if the (SEC) staff believes such a case is warranted,” said Andrew Feller, a former SEC enforcement attorney who joined law firm Kohn, Kohn & Colapinto as senior special counsel last year.
“I would also worry that the White House might interfere with the SEC’s independence in pursuing such a case,” he said.
And, Feller isn’t alone in that opinion.
“Oh, wholeheartedly agree,” said Corey Frayer, who served as senior adviser to former SEC Chair Gary Gensler before joining the Consumer Federation of America in February as director of investor protection. “I think that will be true across all markets.”
According to Trump’s
“These regulatory agencies currently exercise substantial executive authority without sufficient accountability to the President, and through him, to the American people,” the order said.
A section of the order pertaining to apportionments for independent regulatory agencies said the director of the Office of Management and Budget on an on-going basis shall “review independent regulatory agencies’ obligations for consistency with the President’s policies and priorities…”
Prior to his role at the SEC, Frayer worked for House and Senate committees that have oversight over independent financial regulators.
“Congress has always made it clear that the independent agencies they’ve established are accountable to them,” he said.
With his executive order, President Trump is essentially “grabbing power from Congress to oversee agencies and taking control of the rule-making apparatus,” Frayer said.
“Further politicizing the SEC is an assault on investor trust that resonates across every U.S. market and makes one wonder if Wall Street’s silence evidences fealty to the President or a total disregard for their self-preservation,” he said.
The president’s executive order “is unlike anything since probably the Watergate era,” KKC’s Feller said, adding that “there’s a long history of enforcement operating without political interference.”
“During Trump’s first term then-Chairman Jay Clayton was viewed as having insulated the commission and its staff from significant political interference,” Feller said. “I worry that the executive order suggests they’re seeking to avoid that outcome this time around.”
Ed Fierro, who served as senior counsel to the director of the SEC’s Office of Municipal Securities before joining law firm Bracewell as a partner, said while he doubted that the executive order would stop the SEC from investigating fraud, it could cause the SEC to not pursue lesser violations.
“The director of enforcement as well as the public finance abuse unit, they set priorities each year and I think to the extent the chairman of the SEC has to align his priorities and standards with the president’s policies and priorities, I assume that would trickle down,” Fierro said.
“While they may still go after fraud cases, they may not go after record-keeping or less egregious violations where there’s no investor harm,” he said.
In a statement Thursday, the American Securities Association hailed the president’s action to “rein in independent agencies,” including the SEC.
“We applaud the President for rightfully re-asserting the executive’s power over the SEC,” ASA President and CEO Chris Iacovella said in the statement. “Bringing transparency and accountability back to the American people will help return our republic to its founding principles.”
An SEC spokesperson also declined to comment.