As Chairman Atkins and members of the House Committee on Financial Services discussed potential legislative and regulatory efforts to address topics such as capital raising and crypto assets at the House Committee on Financial Services hearing yesterday, it called to mind one of the dilemmas that the SEC faces with its rulemaking efforts – the chicken and the egg problem. All things being equal, the SEC would generally prefer for Congress to enact legislation that authorizes the SEC to adopt implementing regulations in order to meet a particular policy objective. This puts the SEC on much better standing in the courts and provides the SEC with (mostly) clear direction from the legislative branch on the regulatory matter at hand. The legislative path also allows the SEC to deploy its scarce resources toward other rulemaking initiatives, because Congress is doing the legwork to define the direction that the SEC must pursue, rather than having the SEC use the somewhat inefficient notice and comment rulemaking process to triangulate on a regulatory approach.

The dilemma arises because there is no assurance as to when or if Congress is able to pass legislation, particularly in these fractured political times. As we know all too well, bipartisan action on legislation is pretty rare these days, so even good ideas can have a hard time advancing from bill to law. As Chairman Atkins noted in his testimony, there is pending legislation in Congress addressing significant aspects of the SEC’s agenda, including the House and Senate capital formation bills and the CLARITY Act addressing crypto markets. From a regulator’s perspective, the question arises as to whether the SEC should use its existing authority to proceed with rulemaking in these areas within the potentially limited time available, or wait around for the legislative process to play out before investing significant resources into the rulemaking effort, which could ultimately face legal challenges in the absence of clear legislative authority.

It will be interesting to see how the SEC navigates this conundrum over the course of the coming weeks and months.

– Dave Lynn