SEC Soon to Have Five Sitting Commissioners; Budget Constraints Will Stymie Enforcement

By Jerri-Lynn Scofield, who has worked as a securities lawyer and a derivatives trader. She now spends much of her time in Asia and is currently working on a book about textile artisans.

The Senate Banking Committee on Wednesday voted unanimously to approve Hester Peirce and Robert J. Jackson, Jr. as members of the Securities and Exchange Commission (SEC). Their nominations now move to the full Senate for confirmation.

If, as expected, these two nominees are soon confirmed, the five-member bench of SEC commissioners will be up to full strength for the first time in two years.  Chairman Jay Clayton, a former Sullivan & Cromwell partner as chair, has been assertively pursuing a deregulatory agenda, as I discussed in Doubling Down on Deregulation: SEC Extends JOBS Act Benefit in Elusive Quest to Goose IPO Market. With five commissioners seated, it will be much easierfor the agency to meet baseline quorum requirements and to conduct day to day business.

Peirce, a Republican, is currently a senior research fellow at the Mercatus Center at George Mason University and director of the Financial Markets Working Group. Prior to the Mercatus gig, she served on Senator Richard Shelby’s staff on the Senate Committee on Banking, Housing, and Urban Affairs. She’s also been an SEC staff attorney and as counsel to (former) commissioner Paul Atkins, according to her biography on the Mercatus Center’s website.

Robert J. Jackson Jr., a Democrat, is a professor of law and director of the Program on Corporate Law and Policy at Columbia Law School. Before joining the Columbia faculty in 2010, Jackson served as an adviser to senior officials at the Department of the Treasury and in the Office of the Special Master for TARP Executive Compensation. And before that, Jackson practiced in the executive compensation department of elite New York law firm Wachtell, Lipton, Rosen and Katz, according to his biography on the Columbia Law School website.

Weakened Enforcement Priorities?

Last week, the WSJ reported that Steven Peikin, the SEC’s current co-director of enforcement, signaled a pivot away from the prosecutorial approach to enforcement that the agency pursued after the financial crisis (see SEC Signals Pullback From Prosecutorial Approach to Enforcement).

Peikin’s remarks were made at at Securities Docket’s annual Securities Enforcement Forum in Washington, as BNA.com reported in SEC Should Clarify Path to Cooperation Perks in Cases: Official.

I should mention in passing that Steve Peikin and I were law school classmates (HLS ’91) and were indeed in the same section– meaning we took all our first year core classes together.  And, most recently, he was a partner at Sullivan & Cromwell, the firm where I was once an associate. So, while I can say I would certainly recognize him across a crowded room, I cannot claim I really knew him, nor have I any recollection of even being in the same room as he since our Cambridge days.

According to the WSJ:

[Peikin] indicated the regulator would drop the “broken windows” strategy of pursuing many cases over even the smallest legal violations, and may also pull back from trying to make some companies admit to wrongdoing as a condition of settling with the SEC.

As I’ve discussed further in Financial Regulatory Rollback Proceeds, no new legislation is necessary for financial regulation to be loosened  in many key areas– and enforcement priorities will be of major importance.

In particular:

Mr. Peikin cast doubt about the future of a signature element of the SEC’s enforcement program over the past four years: admissions of wrongdoing. Under former Chairman Mary Jo White, an Obama appointee, the SEC sought admissions of fault by firms and individuals in select cases, rather than allowing defendants to resolve probes by paying penalties but neither admitting nor denying the allegations.

Instead, Peikin pledged:

would continue to run a tough enforcement program, with the goal of rooting out intentional wrongdoing that results in losses for investors. He signaled the SEC could still seek admissions of wrongdoing in certain cases, including those where a defendant admitted guilt in a related criminal case.

Now, I don’t dispute that the SEC intends to dial back its commitment to seeking admissions. Yet I want to raise here: How much of a policy change does this announced shift actually represent?

And as an answer to that question, a closer reading of the WSJ piece suggests an answer that reflects less of a policy change than meets the eye. While it’s certainly true that the agency purported to be pursuing a tougher enforcement line, post 2013, when it announced a policy change with much fanfare:

In 2013, under [then chair Mary Jo] White’s leadership, the SEC announced it would make companies and individuals admit wrongdoing as a condition of settling civil charges in certain cases. Critics of the SEC’s practice of settling cases without fault admissions, including U.S. District Court Judge Jed Rakoff, said it made enforcement cases look like the “cost of doing business” for Wall Street.

The WSJ largely buys the agency’s claim that this announcement then resulted in an actual, quantifiable, meaningful change. Yet in this regard,  as in so many other policy areas, especially involving legal issues, the reality didn’t match the rhetoric– as I’ve argued elsewhere in previous writing about White’s performance. In fact, her tenure as SEC chair was so disappointing it led Senator Elizabeth Warren to call for White’s firing. (For further details, see this post, in which I debunked White’s claim that the SEC pursued “bold and unrelenting results” in enforcement, News Flash: Mary Jo White Claims SEC Produces “Bold and Unrelenting Results”. And I refer interested readers to this post, the headline of which states my core point clearly: Mary Jo White Leaves Behind a Weakened SEC for Trump to Weaken Further.)

(I am of course aware that White was chair, not director of enforcement; but she clearly set a tone, and as the bold and unrelenting results post described at greater length, took credit for the agency’s enforcement record. So criticizing her enforcement claims is fair game.)

Now, this is by no means a unique interpretation on my part. In fact, the very same WSJ article goes onto produce statistics suggesting the announced policy was in fact honored more in the breach than not (my emphasis):

During Ms. White’s tenure, few settlements involved admissions of wrongdoing. Only about 2% of 2,063 cases filed from 2014 through 2017 involved admissions, according to research by David Rosenfeld, a professor at the Northern Illinois University College of Law. Just 22 entities admitted fault in the most serious type of fraud cases, according to Mr. Rosenfeld’s paper, which is slated to appear in the Iowa Law Review.

“It’s used so infrequently that it smacks of being somewhat unfair,” said Linda Chatman Thomsen, a partner at Davis Polk & Wardwell LLP who defends companies and individuals targeted in SEC enforcement probes.

So,while the current SEC may be dialing this policy back, it’s doing so from a measly starting point.

Frozen Budget, Shrinking Enforcement Staff

That means that this enforcement change, per se, is not one that’ll keep me awake at night.

Much more worrying in my opinion is that the SEC’s budget is essentially frozen, and will lead to a staff decimation, as the same WSJ article reports:

“It may be the case that we have to be selective and bring a few cases to send a broader message rather than sweep the entire field,” Mr. Peikin told a securities conference Thursday. He said the enforcement division, which had about 1,400 employees in 2016, might have 100 fewer investigators and supervisors by next September by not replacing those who leave.

I should close by mentioning that before ascending to his S & C partnership, Peikin was a respected prosecutor, an assistant US attorney for the southern district of New York. Despite my passing acquaintance,  I have no special insight into how vigorously he’ll pursue enforcement goals. I am not naive and am aware of course of the special conflicts problems raised by the revolving door. But I also do believe that lawyers can (and certainly have, at least in the past), managed to take different positions, based on the demand of different roles.

This is all a rather speculative, and may be a moot point, since no matter how aggressive Peikin might like to be in rooting out corporate wrongdoing, that will be a difficult goal to achieve, with a frozen budget and a shrinking staff.

Which is no doubt exactly what our current crop of Congresscritters intended