On Tuesday, November 15, 2016, the Securities and Exchange Commission (SEC) announced that Chair Mary Jo White will resign as SEC Commissioner effective January 20, 2017, concurrently with the end of President Obama’s term of office. The SEC has five commissioners who are appointed by the President with the advice and consent of the Senate. To ensure that the SEC remains nonpartisan, no more than three commissioners may belong to the same political party. There are already two vacancies on the commission, and, because of congressional gridlock, President Obama’s nominations to fill these vacancies—one Republican and one Democrat—have not been confirmed by the Senate. In light of Chair White’s resignation, President-elect Trump will have the opportunity to appoint three commissioners, including at least two Republicans. Given President-elect Trump’s plan to “dismantle” the Dodd-Frank Act, some anticipate a more laissez-faire approach to regulation and enforcement by the SEC in the future.
The SEC Under Chair White’s Leadership
Upon becoming the SEC Chair in April 2013, Chair White was tasked with overseeing the implementation of many of the new regulations required by the Dodd-Frank Act and the JOBS Act. By the SEC’s own count, Chair White advanced more than 50 rulemaking initiatives pursuant to such legislation. For instance, during Chair White’s tenure, the SEC, working with other financial regulators, finalized the Volcker Rule’s restrictions on proprietary trading and investments by banks. The SEC also adopted reforms to the government and management of the credit rating agencies and put in place rules for a new regulatory framework for security-based swaps. With respect to the municipal securities markets, the SEC has established safeguards to protect municipalities and investors from conflicted advice and unregulated advisors. The SEC has also adopted rules for the asset-backed securities market in an effort to protect investors and increase the accountability of those packaging such securities. In the area of executive compensation, the SEC has adopted rules to require more extensive disclosure, including disclosure of the ratio of a CEO’s salary to a company’s median employee salary. Finally, the SEC has also adopted rules that fundamentally reform the money market industry and implement protections for mutual fund investors.
One of Chair White’s immediate priorities upon taking office was to look for ways to make the SEC’s enforcement program more robust because, according to Chair White, deterrence is ultimately the most effective enforcement strategy. Indeed, during Chair White’s tenure, the SEC has brought a record number of enforcement actions. Specifically, according to the SEC, more than 2,850 enforcement actions were brought since Chair White took office in April 2013, and the SEC obtained judgments and orders totaling more than $31.4 billion in monetary sanctions.
Admissions of Wrongdoing
One of the first things Chair White did was modify the SEC’s long-standing protocol of permitting defendants to settle cases without admitting or denying liability or the facts that would establish their liability. Now, for cases involving particularly egregious conduct where the SEC believes there is a greater need for public accountability, the SEC requires wrongdoers to publicly admit what they did. Generally, the SEC considers the following conduct to be egregious: conduct that harms a large number of investors, conduct that poses significant risk to investors or markets, conduct that obstructs SEC investigations and conduct demonstrating that the defendant presents a future threat to investors or markets. According to the SEC, it has required admissions from more than 70 defendants, including 44 entities and 29 individuals.
“Broken Windows” Policy
In strengthening the SEC’s enforcement capabilities, Chair White has also pressed the Division of Enforcement to employ a “broken windows” strategy of pursuing minor securities violations as well as the more significant and complex ones. It is Chair White’s view that the failure to address these minor violations fosters an attitude that allows more serious crimes to occur. The SEC pursues many of these smaller infractions through streamlined investigations and often brings a number of cases at the same time to strengthen the impact of the “broken windows” strategy.
Critics of Chair White’s Strategy and Leadership
Chair White’s leadership and enforcement strategy has not been without its critics. For instance, Commissioner Michael S. Piwowar said in an October 2014 speech that a broken windows approach is misguided because it creates an environment in which regulatory compliance is the most important object for market participants and that this loses sight of the underlying purpose for having regulation in the first place, which is to enable vital and important economic activity. Also, a strategy of pursuing the “low-hanging” violations can be viewed as a way for the SEC to increase its enforcement statistics. As Commissioner Piwowar stated, this may be a flawed metric to measure the effectiveness of the SEC’s enforcement program because it simply measures outputs, not outcomes.
Sen. Elizabeth Warren (D-MA) is one of Chair White’s most vocal critics. Sen. Warren sent a letter to Chair White in June 2015 expressing her dissatisfaction with Chair White’s leadership. In particular, Sen. Warren pointed out that, among other things, the SEC had failed, at the time the letter was sent, to finalize important Dodd-Frank rules requiring disclosure of the ratio of CEO pay to the median employee; failed to curb the use of waivers for companies found to be in violation of securities laws; and settled the vast majority of cases without requiring that companies admit wrongdoing—despite the SEC’s new policy regarding the admission of wrongdoing. Sen. Warren also took issue with what she perceived as Chair White’s failure to address conflict-of-interest concerns related to her husband’s role as an attorney at Cravath, Swaine & Moore LLP, a firm that frequently represents companies with business before the SEC.
More recently, in October 2016, Sen. Warren sent a letter to President Obama requesting that he immediately designate another commissioner to replace Chair White. Sen. Warren cited what she viewed as Chair White’s refusal to develop a political spending disclosure rule. Sen. Warren also argued that Chair White has neglected to complete congressionally mandated Dodd-Frank rules and instead focused the SEC’s limited resources on pursuing the disclosure effectiveness initiative, which Sen. Warren attributed to what she considers Chair White’s “unapologetic anti disclosure posture.”