The Shadow SEC: Alarming Trends Threaten the Integrity and Independence of the Securities and Exchange Commission

Two years ago, a distinguished group of five legal scholars—John Coates of Harvard Law, John C. Coffee, Jr. and Merritt Fox of Columbia Law, James Cox of Duke Law, and Joel Seligman of the University of Washington Law—convened to establish an oversight body they named The Shadow SEC. This initiative, drawing inspiration from the long-standing Federal Reserve Shadow Open Market Committee, aims to foster critical policy discussions and debates concerning federal securities laws and the Securities and Exchange Commission (SEC). The formation of this academic collective underscores growing concerns among legal experts regarding the direction and effectiveness of the nation’s primary securities regulator.

Since its inception, The Shadow SEC has issued eight formal statements, addressing a range of crucial topics from the importance of an independent SEC and the impact of budget cuts to the vigorous enforcement of FCPA (Foreign Corrupt Practices Act) books and records requirements and the preservation of the Public Company Accounting Oversight Board (PCAOB). These statements, published on platforms such as Columbia Law School’s Blue Sky Blog, serve as public interventions, offering expert analysis and alternative perspectives on SEC policy and operations.

A Commission Under Scrutiny: The Evolving Landscape of the SEC

Professor Joel Seligman, a co-founder of The Shadow SEC and a prominent author in the field of securities law, including the seminal "The Transformation of Wall Street: A History of the Securities and Exchange Commission and Modern Corporate Finance," recently articulated profound concerns about the current state of the SEC. In an interview with Corporate Crime Reporter, Seligman highlighted several unprecedented challenges that distinguish the present environment from previous periods of scrutiny faced by the agency.

The Erosion of Bipartisan Governance

A primary concern raised by Professor Seligman is the current composition of the SEC, which, since January 2026, has operated as a "one-party commission." The agency is led by three Republican commissioners, with Paul Atkins serving as chair, and notably, no Democratic commissioners. This configuration starkly deviates from the statutory model, which mandates a five-person commission with no more than three members associated with any single political party. While the law does not explicitly compel the appointment of five commissioners at all times, this imbalance significantly alters the internal dynamics of the SEC.

Seligman argues that the absence of minority commissioners stifles the "robust internal debate" that is crucial for an agency tasked with navigating complex financial and securities issues. Historically, minority commissioners have played a vital role in raising dissenting views, prompting deeper consideration of policy proposals, and potentially influencing the final outcomes. Without this bipartisan challenge, the current commission enjoys "unusual latitude" to pursue its agenda, potentially leading to less scrutinized and less balanced policy decisions. Adding to this structural vulnerability is the SEC’s internal quorum rule, which allows the commission to operate with "whatever number are in office," rather than requiring a majority. Seligman advocates for statutory amendments to mandate bipartisan representation and to overrule this internal quorum rule, thereby reinforcing the agency’s intended structure.

The Assault on Agency Independence

Beyond its internal composition, the SEC’s independence is under a "ferocious attack" stemming from broader executive branch theories. Professor Seligman points to the ongoing legal challenges before the Supreme Court concerning the "at-will" removal of commissioners from independent regulatory agencies. While some agencies, like the Federal Reserve System, have statutory provisions requiring "cause" for commissioner removal, the potential for the Supreme Court to rule that SEC commissioners can be removed "at will" would fundamentally undermine the agency’s ability to act as an impartial, expert body.

This judicial scrutiny is intertwined with the "unitary executive theory," a concept championed by the Trump administration and foundational to initiatives like the Heritage Foundation’s Project 2025. This theory posits that the President possesses ultimate authority over the executive branch, including independent agencies, and can direct or remove their leadership at will. Seligman counters that this interpretation misapprehends the U.S. constitutional model of checks and balances. While acknowledging Alexander Hamilton’s emphasis on an "energetic executive" in the Federalist Papers, Seligman clarifies that Hamilton’s intent was to ensure the President’s capacity to govern effectively within a system of separated powers, not to grant unfettered control over independent bodies. The implications of such a ruling are profound, potentially transforming independent agencies into direct extensions of presidential power, rather than expert bodies insulated from immediate political pressures.

It is important to note that even with statutory independence, agencies like the SEC are not "all powerful unto themselves." They rely on Congress for their budget, which passes through the Office of Management and Budget, and their commissioners are appointed by the President, providing significant leverage to both the legislative and executive branches. However, the current "one-party agency with an ongoing assault being made on the right of any independent agency to avoid at will appointments" represents a significant departure from established norms.

Erosion of Enforcement and Investor Protection

The current environment at the SEC, according to Seligman, has led to a "dismal" reversal of the robust enforcement program historically championed by figures like Stanley Sporkin, a former head of SEC enforcement known for his aggressive pursuit of major corporate transgressions. Sporkin’s philosophy of "chopping at the top" – targeting the largest firms to create a deterrent effect across the market – appears to have been largely abandoned.

A striking example of this shift is observed in the cryptocurrency sector. Seligman notes that "virtually every major crypto case" initiated during the Biden administration – including those against prominent platforms like Binance and Coindesk, totaling over twenty cases – has been "either withdrawn, dismissed or settled" since Paul Atkins assumed the chair in January 2026. This contrasts sharply with the SEC under former Chair Jay Clayton during the first Trump presidency (2017-2021), which brought 57 cases against crypto firms. This dramatic change signals a significant de-prioritization of crypto enforcement.

Further exacerbating this trend, the SEC has reportedly supported legislation that would curtail its enforcement powers in the crypto space. This includes backing the "Genius Act," which would effectively remove stablecoins from the SEC’s regulatory purview, and the "Clarity Act," which would further limit the agency’s ability to pursue enforcement actions against cryptocurrency entities. Additionally, President Trump has reportedly issued pardons to crypto executives, sending a powerful message about the administration’s stance on enforcement in this sector.

Seligman acknowledges that the SEC is "not bringing no cases," but emphasizes that the closure of major cases and the support for legislation limiting its authority represent an "unprecedented" shift. This retreat comes despite widespread evidence of "major fraud," "money laundering," and "inadequate corporate leadership" within the crypto industry, issues that have been extensively documented by major news outlets.

Staffing Cuts and Leadership Exodus

The effectiveness of any regulatory body is directly tied to the strength and experience of its staff. Seligman reports that public data indicates a "twenty percent" decrease in SEC staff over a two-year period, a reduction he deems "serious." Even more concerning is the significant departure of "senior staff" – experienced individuals who are crucial for leading complex investigations and enforcement actions. This brain drain weakens the agency’s institutional knowledge and capacity to undertake sophisticated oversight.

The challenges in enforcement leadership were further highlighted by the brief tenure of Judge Margaret Ryan as enforcement director. Appointed last year, Ryan made a public statement in February asserting that "reports that enforcement work at the SEC has been tossed to the wayside are not only greatly exaggerated but flat out wrong." She emphasized a focus on "quality and impact" over mere numbers of enforcement actions. However, Ryan resigned just weeks later, amid reports that her departure was linked to "resistance pursuing cases against Trump’s circle." While Seligman could not confirm the specifics of Ryan’s resignation, he reiterated his deep concern over the exodus of senior SEC attorneys from the crypto space, which he views as deeply problematic for the agency’s investigative capabilities.

Broader Context: Political and Financial Pressures

Professor Seligman argues that the current "assault" on the SEC is qualitatively different from previous challenges due to a confluence of factors:

1. Presidential Immunity: Recent Supreme Court decisions on presidential immunity, while referring to potential charges post-office, have largely strengthened the power of a President to operate without immediate legal restraint or ethical oversight while in office. This creates an environment where executive actions, including those impacting regulatory agencies, may face fewer immediate checks.
2. Campaign Finance and Influence: The Citizens United Supreme Court decision, by allowing unlimited independent political spending by corporations and unions, has significantly amplified the influence of wealthy donors. This provides "opportunities to those with great wealth to try and influence the President by providing tremendous contributions to the President’s political campaigns," potentially leading to policies favorable to specific financial interests.
3. Allegations of Personal Enrichment: Seligman posits that the most distinguishing factor is the "systematic effort to use the Presidency to enrich oneself while in office." He notes widespread documentation by media outlets of President Trump allegedly "profiting by several millions of dollars from this industry" (referring to crypto) and seeking "personal wealth and contributions to his family and his family trust." This perceived willingness to leverage public office for private financial gain, according to Seligman, creates an "extraordinary" situation "different from any previous activities we have seen from any President of this magnitude."

These factors, combined with the weakening of the SEC’s independence, create an environment ripe for what Seligman describes as "corruption in the Trump administration, its willingness to have accepted money and investment from individuals who simultaneously receive benefits, whether in the form of cases dismissed, pardons or other financial emoluments."

The Call for Accountability and Future Outlook

Despite the challenges, Professor Seligman and The Shadow SEC are actively working to provide independent analysis and advocate for robust regulatory oversight. They utilize platforms like Columbia Law School’s Blue Sky Blog to publish their statements and actively engage in the public comment process for SEC rule proposals. For instance, in response to a proposal for semi-annual reporting, The Shadow SEC submitted comments, joining 96% of approximately 1,000 other submissions that opposed the change. Critics argued that such a move would hinder investor understanding, destabilize prices, undermine confidence in management, and impede the monitoring of compliance with securities laws. While Paul Atkins and others argue that detailed regulations stifle innovation and add unnecessary costs, The Shadow SEC maintains that "the benefits of full and complete reporting far outweigh those apparent costs." Seligman encourages concerned citizens to participate in this public comment process, emphasizing its accessibility and importance.

The path forward for the SEC remains uncertain. The "revolving door" phenomenon, where former SEC staffers transition to lucrative positions in corporate law firms representing regulated entities, presents a practical challenge to organized internal resistance. While many former employees may be "outraged," their employment often "effectively gagged" them from public criticism. However, Seligman notes that not all private firms are defense-oriented, and opportunities exist for those critical of SEC actions, though the overall career landscape is a "real factor" influencing former staff.

Professor Seligman expresses hope that the "repulsion at what appears to be corruption in the Trump administration" will become a significant theme in the 2026 elections. He draws historical parallels to major corporate and political scandals such as Teapot Dome, the vicuna coat affair, Enron, and WorldCom, arguing that while not all corporate crime becomes a political issue, "major corporate crime" and the perception of a President exploiting his position for financial benefit can resonate deeply with the public. Public complaints about rising prices and a President seemingly prioritizing personal gain over public service could galvanize voters, shifting the political landscape and potentially influencing the future direction of the SEC.

Until then, the ongoing "weakening of the independence of the SEC alongside the willingness of President Trump and others in his administration to receive benefits of unprecedented magnitude" poses a critical threat to investor protection and the integrity of U.S. financial markets. The vigilance of groups like The Shadow SEC and the engagement of the public will be crucial in navigating these turbulent waters.