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The Partisanship of Financial Regulators

Journal: Review of Financial Studies

Date: 20231101

Author: Engelberg, Joseph; Henriksson, Matthew; Manela, Asaf; Williams, Jared

Abstract:
We analyze the partisanship of Commissioners at the SEC and Governors at the Federal Reserve Board. Using recent advances in machine learning, we identify partisan phrases in Congress, such as "red tape" and "climate change," and observe their usage among regulators. Although the Fed has remained relatively nonpartisan throughout our sample period (1930-2019), we find that partisanship among SEC Commissioners rose to an all-time high during the 2010-2019 period, driven by more-partisan Commissioners replacing less-partisan ones. Partisanship at the SEC appears in both the language of new SEC rules and the voting behavior of SEC Commissioners.

Link: Google Scholar

Key Findings

Rising SEC Partisanship

SEC Commissioners' partisanship reached an all-time high in 2010-2019, while the Federal Reserve has remained relatively nonpartisan throughout 1930-2019.

Partisan Language in Regulations

When partisanship is higher, regulatory text is more likely to reflect the language of the majority party's congresspeople, particularly in proposed and finalized rules.

Partisan Voting Patterns

SEC voting has become increasingly partisan, with dissenting votes rising dramatically since 2010 and occurring along party lines 97% of the time when two commissioners dissent.

Partisanship Trends at SEC vs Fed

  • SEC partisanship increased significantly in the 2010s to 0.513
  • Fed maintained low partisanship levels, peaking at 0.504 in the 1970s
  • SEC partisanship growth driven by more-partisan commissioners replacing less-partisan ones

SEC Dissenting Votes Over Time

  • Dramatic increase in dissenting votes from 2016-2019
  • Number of annual dissents rose from 1-12 in 2011-2015 to 32-221 in 2016-2019
  • 97% of two-commissioner dissents come from same party members

Partisan Language in Register Text

  • Register text shows higher partisanship in rules vs notices
  • 10-20% of speech partisanship spills over into regulatory language
  • Effect is stronger for proposed and finalized rules compared to notices

Contribution and Implications

  • First comprehensive analysis of partisanship in financial regulatory bodies using text analysis
  • Demonstrates that institutional safeguards at the Fed have been more effective than at the SEC in preventing partisan influence
  • Highlights how increased political polarization can affect regulatory institutions despite structural protections

Data Sources

  • Partisanship trends chart based on Table 1 and Figure 4 data showing Congress-based regulator partisanship measures
  • Dissenting votes visualization constructed using data from Figure 8 showing SEC dissent activity by year
  • Register text partisanship chart created using data from Table 6 and Table 7 showing RegisterPartisanship measures