The progressive movement has declared war on the Securities and Exchange Commission (SEC) and its chair, Mary Jo White. An uncoordinated yet scathing series of reports, letters and appeals have honed in on the New Deal-era regulatory body. And the fight is really about the agency’s long-term direction, as vacancies on the commission open up: Will it maintain the same industry-friendly posture of light-touch regulatory enforcement and ineffective rulemaking, or can a shift be made? Given the growing importance of the SEC, reformers are using whatever leverage they have to influence the outcome.
You might believe Senator Elizabeth Warren’s 13-page letter to White, expressing personal disappointment with her tenure, kicked off this uproar. But separately, a growing discontent with the SEC has emerged within the financial reform community, and even within the agency itself. Former officials have called the SEC dysfunctional and even warned colleagues from joining up.
White, a political independent, has had two reliable reformers on the five-member commission, Democrats Kara Stein and Luis Aguilar. But she has not moved forward on any rulemaking that deviates from the narrow interests of a myopic career staff. Indeed, the pace of rule-writing has been amazingly slow, with agenda items dating back to the 2010 Dodd-Frank law still awaiting final rules. Experts point to gridlock between Democrats and Republicans on the panel, and White’s lack of experience with financial policymaking.
Enforcement, where White at least had some background, has been even more unsatisfactory, with White ignoring pervasive misconduct, tallying up few big cases and often siding with Republican commissioners to lighten punishment. Stein, the more blunt of the two Democrats, has repeatedly spoken publicly against the agency waiving automatic penalties for companies convicted of criminal fraud, most recently for Deutsche Bank after they pled guilty to rigging the benchmark LIBOR interest rate. “It was a complete criminal fraud upon the worldwide marketplace,” Stein said, yet Deutsche Bank was allowed to retain business lines they are supposed to lose after criminal convictions.
The former head of enforcement to the SEC, Robert Khuzami, and more recently Mary Jo White’s chief counsel Robert Rice, are Deutsche Bank alumni. The current general counsel at Deutsche Bank, Richard Walker, is another former SEC chief of enforcement. The incestuous relationship between this leading Wall Street regulator and the industry it regulates has been a longtime concern, and White has displayed a clear continuity with that trend.
Warren, who supported White’s confirmation and wrote her letter in a tone expressing regret, highlighted the waiver issue, along with three others: the five-year delay to a rule forcing corporations to disclose the ratio between the pay of their CEO and their median worker; allowing securities law violators to “neither admit nor deny” their guilt; and White’s frequent recusals from agency decisions, creating gridlock on rules and enforcement, because of her prior employment and her husband’s continuing career defending Wall Street firms in legal cases.
But many other lines of attack have been added in the last few weeks. Public Citizen accused the SEC of non-compliance with sunshine laws for not holding open meetings to grant waivers for banks who pleaded guilty to manipulating foreign exchange rates. The waivers were granted on May 20, the same day the banks applied for them. The AFL-CIO has sought information about the hiring of Andrew “Buddy” Donahue, a former managing director at Goldman Sachs, as SEC chief of staff, one of several White aides hired after stints on Wall Street. The labor federation wants to know if Donahue received a “golden parachute” from Goldman Sachs for entering government service, a persistent issue they have condemned for years. The SEC has failed to even respond to the AFL-CIO’s entreaties. Three former SEC commissioners, including former Republican and Democratic chairs, urged that White finally advance a rule requiring public corporations to disclose their political spending, something the agency has dragged its feet on since 2011. “The Commission’s inaction is inexplicable,” the ex-commissioners write.
This week’s report from the progressive organization Rootstrikers could be the most damaging. It focuses on White’s corporate lawyer background, and how it permeates her worldview on financial crimefighting. “White has in fact led the SEC exactly as one might expect she would based on her career,” the report concludes, tracking her influential advocacy for Wall Street clients at the Debevoise & Plimpton law firm. Rootstrikers dug up quotes from White about how “prosecutors should moderate” their enforcement actions and guard against a “feeding frenzy,” and they claim she has held to these beliefs with her weak actions at the SEC. (White defended her record in reaction to the Warren letter, and the SEC declined to comment on the Rootstrikers report in remarks to Bloomberg News.)
A secondary reason for the intense scrutiny is that Luis Aguilar is stepping down as a commissioner along with Republican Daniel Gallagher, requiring the Obama administration to nominate replacements. Rootstrikers released a companion petition demanding “No More Mary Jo’s,” and 15 organizations representing most of the financial reform space have also appealed to President Obama to nominate to nominate someone more in the mold of Kara Stein, and not another status quo actor with a Wall Street background who shares White’s timidity. “We need a dramatic change in approach as compared to the pre-crisis SEC,” the letter reads.
Unfortunately, names floated for Aguilar’s job appear to have more in common with White, who has reportedly lobbied for a more moderate voice on the commission. For example, Keir Gumbs of the white-collar defense firm Covington & Burling, a leading candidate, has allegedly given tutorials to CEOs on how to hide their political spending. Other hopefuls have casually rotated between the SEC and Wall Street law firms. A commissioner spinning through the revolving door to join White would give her an assured vote, and marginalize Kara Stein.
The multi-pronged assault on the agency reflects a growing unease among progressive Democrats over an overly cozy relationship between the party elite and Wall Street. They want to widen the pool of nominees for critical regulatory positions over the long-term, a motivating factor in blocking former bank executive Antonio Weiss from a Treasury Department slot. And they feel White’s SEC tenure has been a significant step backward.
The lead agency for investor protection isn’t a natural target for the party’s liberal wing, compared to agencies that defend consumers or regulate banks. But half of all Americans own some form of stock, and their investments can be put at risk by the SEC’s lenient attitude. More important, the securities industry has insinuated itself into more of American life. Individuals and small business increasingly get loans through the capital markets; our 401(k) plans are based on publicly traded investments; and crowdfunding and securitization have given these industry players a central role in our entrepreneurship, our mortgages, our higher education funding, and so on. “We marketized our retirement system, we marketized our banking system, and the SEC is the main securities regulator,” said Marcus Stanley, policy director for the coalition Americans for Financial Reform.
As the battle for SEC reform continues, the question for the White House is simple: Do they want to preside over a legacy of change in securities regulation, or have it defined by continued weakness and industry conflict of interest?