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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

Background and Context

Research Question

The study examines whether increased political polarization in American society has affected the Federal Reserve and SEC despite their institutional features designed to shield them from partisanship.

Methodology

Researchers analyze speech patterns of SEC Commissioners and Fed Governors from 1930-2019 using machine learning to identify partisan phrases and compare them to Congressional speech patterns.

Data Sources

The analysis uses 3,103 SEC speeches, 4,529 Fed speeches, Congressional Record data, and Federal Register text containing rules and regulations.

Rising Partisanship at the SEC vs Stability at the Fed (2010s)

  • The SEC shows increasing partisanship reaching an all-time high of 0.513 in the 2010s
  • The Fed maintains relatively stable, non-partisan levels throughout the period
  • A score of 0.5 represents neutral partisanship, while higher scores indicate increased partisan language

Dramatic Increase in SEC Dissenting Votes (2006-2019)

  • Only one dissenting vote occurred between 2006-2010
  • Dissents increased to 2-12 per year during 2011-2015
  • Dramatic surge to 32-221 dissents per year during 2016-2019

Partisan Alignment of SEC Dissenting Votes (2006-2019)

  • 97% of double-dissent cases involved Commissioners from the same party
  • Only 3% of cases saw bipartisan dissent
  • Strong evidence of party-line voting behavior

Partisan Language in Federal Register Rules (Post-1995)

  • SEC rules show significantly higher partisan language (0.5067) than Fed rules (0.5019)
  • Both scores are statistically different from neutral (0.5)
  • Demonstrates how partisanship affects formal rulemaking

Commissioner Background Impact on Partisanship

  • Commissioners with economics graduate degrees show slightly lower partisanship
  • Other background characteristics show minimal impact on partisan behavior
  • Suggests partisanship is not strongly tied to Commissioner backgrounds

Contribution and Implications

  • First comprehensive analysis of partisanship in financial regulatory bodies using computational linguistics
  • Documents increasing politicization of SEC despite institutional safeguards
  • Demonstrates spillover of partisan behavior from speech into actual rulemaking and voting decisions
  • Highlights different effectiveness of institutional designs at Fed versus SEC in maintaining political independence

Data Sources

  • Partisanship trends chart: Based on Table 1 and Figure 4 data
  • Dissenting votes chart: Based on Figure 8 panels A and B
  • Partisan alignment chart: Based on Section 3.2 discussion of voting patterns
  • Register partisanship chart: Based on Table 6 and Section 3.1 analysis
  • Commissioner background chart: Based on Table 5 regression results