White’s First Year: SEC Enforcement Gets a “Swagger”
April 10, 2014
In the year since Mary Jo White was sworn in as chairman on April 10, 2013, she has emphasized in speech after speech that the SEC is a law enforcement agency above all else.
The tough-talking former prosecutor has built upon changes to the enforcement unit made by former chair Mary Schapiro and Robert Khuzami, former head of the division, who are credited with strengthening enforcement and improving staff morale after the Madoff debacle.
“But I think Mary Jo White has given [the enforcement unit] swagger,” says Thomas Zaccaro, partner at Paul Hastings, whose work at the U.S. Attorney’s Office for the Southern District of New York overlapped with White’s tenure as U.S. attorney from 1993 to 2002.
White has stressed that the SEC will go after both small and large infractions of securities laws. She has made the unit more aggressive, partly through vigorous use of the tools already at the agency’s disposal, but also by arming the enforcement staff with new powers.
For example, White’s move to end the SEC’s longstanding protocol of permitting defendants to settle cases without admitting or denying liability has had a “profound impact” on the settlement process, says Zaccaro.
“It’s a heavy hammer,” says Stephen Crimmins, partner at K&L Gates, adding that White has empowered the enforcement unit in ways the industry has not seen before.
The SEC brought 686 enforcement actions in fiscal year 2013, a record number, with more than $3.4 billion in disgorgement and penalties, up from 10% from the prior year. It brought 140 cases against funds and fund firms during that period, slightly down from the 147 cases brought in that category in fiscal year 2012.
The enforcement staff gained the ability to use deferred prosecution and non-prosecution agreements in certain circumstances in 2010. But under White, the staff has made increased use of those agreements, which is “right out of the U.S. attorney’s playbook,” says Zaccaro.
Closer collaboration with the Division of Economic and Risk Analysis across the agency has meant a greater focus on using data to understand industry risk and then applying that information to the enforcement arena, says Crimmins.
But some industry attorneys question whether White’s work with policymaking has been as strong.
The SEC has moved forward with multiple rules mandated by the Dodd-Frank Act and the JOBS Act — for example, lifting the ban on hedge fund ads and finalizing the controversial Volcker Rule.
Most notably for the fund industry, White issued a proposal for money market fund reforms last June. Her predecessor had failed the previous year to garner support among the five commissioners even to propose a rule.
“I do give the commission credit for proposing something, but that proposal to me reflects a little bit an unwillingness to make a decision,” says Joel Goldberg, of counsel at Stroock, referring to the two alternatives the agency proposed.
One would require prime institutional money funds to use a floating net asset value, while the other would permit the use of liquidity fees and redemption gates in times of market stress.
Time characterized the rule proposal as a compromise that broke a stalemate among the commissioners, but White told the magazine that the SEC, an independent agency, is deciding the issue “on the merits.”
Robert Plaze, partner at Stroock and former deputy director of the SEC’s Division of Investment Management, says White’s focus on enforcement is a “natural consequence” of her background as a prosecutor as well as the constraints she is operating under in the policy space.
Those constraints include the difficulty in reaching a majority vote among the five commissioners on rules and the threat of the U.S. Court of Appeals for the D.C. Circuit’s overturning SEC rules. Since 2005, the court has struck down seven SEC rules or actions on the grounds the agency had not conducted adequate cost-benefit analyses.
The agency’s stepped-up emphasis on enforcement sometimes means that the industry does not have an opportunity to discuss the policy issues that are at stake in a given case, says Paul Huey-Burns, partner at Shulman Rogers.
“Enforcement actions do represent policy decisions,” he says. “[And] the perception in the industry is that the ability to talk about policy implications is getting shunted to the side by the more prosecutorial approach.”
On the policy side, the SEC has also called attention to its increased use of guidance updates, but while the additional guidance is often welcome, some would prefer that the SEC make more use of its rulemaking powers.
“The problem with guidance is that it skirts the rulemaking process,” says Stroock’s Goldberg. “People don’t get a chance to comment on a proposal, and oftentimes, the staff can learn a lot from the comments.”
The SEC did not respond to a request for comment by deadline.
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February 8, 2013 Khuzami Leaves Overhauled SEC Enforcement Unit