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As the state-by-state predictions are made on big election nights these days, the phrase “too close to call” is a common one. The same can be said for many aspects of enforcement policy and regulation for the nation’s financial markets in 2017 and beyond when President-elect Donald J. Trump will occupy the White House.
However, it wouldn’t be unreasonable to think that, once the new administration gets rolling, the SEC’s enforcement posture will be quite different from what we have seen in recent years. We are going from an administration whose SEC Chair Mary Jo White, considered herself to be the “tough cop on the financial beat,” to one with Treasury Secretary Steven Mnuchin, the chief executive of a private hedge fund and a former 17-year partner at Goldman Sachs. Also, the president-elect picked billionaire Wilbur Ross for secretary of commerce, and tapped former SEC Chair Paul Atkins to lead the SEC transition team.
According a Reuters article published in FORTUNE® magazine, Atkins is on the short list to head the agency. Atkins served as SEC chair in President George W. Bush’s administration from 2002 to 2008. As founder of consulting firm Patomak Global Partners, he has “conservative views on everything from enforcement penalties to corporate governance” which are “likely to be reflected in the SEC’s agenda,” according to the Reuters/FORTUNE article.
But if the 2016 presidential election has taught us anything, it’s that time spent making predictions might be better devoted to tying flies, becoming a sushi chef or taking up race walking.
White’s “Resounding” Record of Enforcement
Outgoing SEC Chair White is proud of her record. During a Nov. 18, 2016 speech at the New York University School of Law she hailed the “resounding success” of the SEC’s enforcement program. “In the last three fiscal years, we have brought record numbers of enforcement actions, obtained unprecedented monetary remedies in the billions of dollars, and returned hundreds of millions of dollars to harmed investors.” In the final fiscal year, the agency brought 868 enforcement actions, up from 676 in 2013. (A New Model for SEC Enforcement: Producing Bold and Unrelenting Results, Mary Jo White, SEC Chair, Nov. 18, 2016.)
Considered by some to be moderate, White drew criticism from conservatives for her aggressive enforcement posture, and liberals, such as Sen. Elizabeth Warren (D-MA), for not developing a rule requiring corporations to report their political contributions. In October 2016, Warren urged President Obama to replace White. Following the election of Trump, White announced her plans to step down.
During her New York University School of Law speech, it’s clear White felt these activities were the hallmark of her time running the SEC:
White made it clear the next responsible individuals she had in mind were people at the top by “expanding the reach of liability for senior executives.”
“If we are to be more effective in pursuing and deterring white collar wrongdoing,” White said, “we must first be clear-eyed and knowledgeable about what conduct current law reaches—and doesn’t—and to be always mindful of relentlessly pursuing the evidence wherever it leads, but doing so fairly. We need to sort through the political rhetoric and decide whether (and how) we want to amend current laws—civil and criminal—to more frequently impose liability on executives and officers for offenses committed by employees ‘on the watch’ of the executives and officers.”
The Future of Oversight
At the time this article was written (mid-December 2016) PEOTUS Trump had not selected an SEC chair, but his pick of Atkins to lead his SEC transition team is telling. Atkins was a “staunch critic” of the Public Company Accounting Oversight Board, for example, the Reuters/FORTUNE article said, an entity that doesn’t have many fans in the GOP either.
Trump didn’t give many specifics about financial regulation during his campaign, but said he would repeal the 2010 Dodd-Frank Act. According to POLITICO®, Mnuchin is also “skeptical” of the Dodd-Frank Act but hasn’t indicated he would kill the law altogether.
POLITICO also commented that Trump’s selection of Mnuchin signals that he will be “turning to Wall Street to help run his incoming government.” Mnuchin will not be the first Goldman Sachs alum to become treasury secretary. Others were Henry Paulson, who served in the George W. Bush administration, and Robert Rubin, who served in the Clinton administration. Donald Trump’s chief strategist and Senior Counselor Steve Bannon also is a Goldman Sachs alum. Right now there are more questions than answers.
In his Nov. 9, 2016, article in The New York Times®—“How Trump’s Presidency Will Change the Justice Dept. and SEC”—Wayne State University law professor Peter J. Henning raised the issue of whether significant budget cuts will mean fewer resources for investigation and enforcement of white collar crime. Henning predicted, though, that enforcement of the Foreign Corrupt Practices Act will continue. “The Justice Department depends in large part on companies to self-report violations of this law and conduct internal investigations to determine the scope of the misconduct … Many of the cases involve foreign companies that have paid millions of dollars in fines, and they are a way to show the public that global enterprises are being overseen to ensure compliance with American law.”
“Does Any of it Matter?”
The Nov. 16, 2016 Reuters/FORTUNE article pointed to Atkins’ belief that individuals should be punished for their misconduct—not shareholders. The article predicts easing of corporate auditing rules, changes in trading regulations, less protection for whistleblowers and rules favorable to small businesses that need to raise capital.
Professor Henning concluded The New York Times article by saying: “With the Republicans in control of Congress, the SEC may not be able to fend off efforts to rein in its authority and cut its budget, especially if Mr. Trump is willing to go along with them. That may put Wall Street’s chief regulator on the defensive from the beginning of his administration.”
Timothy W. Mungovan, Kevin J. Perra, Howard J. Beber and Sean J. Hill of Proskauer Rose, in their article about outgoing SEC Chair White’s speech, asked, “Does any of it matter?”
“President-elect Trump has suggested that he wants to dismantle the Dodd-Frank Act. What that means, precisely, and whether it will happen, are open questions. Of course, it would take an act of Congress to repeal Dodd-Frank,” the attorneys wrote in Proskauer’sThe Capital Commitment blog.
“On that note, Rep. Jeb Hensarling (R-TX), the chairman of the House Financial Services Committee, has introduced the Financial CHOICE Act of 2016 which, as drafted, would exempt advisers to private equity funds from investment adviser registration. As reported in The Wall Street Journal®, Rep. Hensarling described President-elect Trump’s general view on Dodd-Frank as “music to my ears,” and stated that he had spoken with President-elect Trump’s team about the Financial CHOICE Act in the past: ‘I think they like the thrust of the legislation and many major components of it.’”
Change takes time, and so do complex investigations like those undertaken by the SEC, so the impact of any changes in the new administration are likely not to be immediate.
“While it remains to be seen whether the SEC will continue its aggressive enforcement program following the change of the presidential administration and the appointment of a new SEC chair,” the Proskauer attorneys wrote, “Chair White’s legacy is likely to continue to shape the agency’s policies and ideology at least in the near term. Accordingly, private fund sponsors should expect the SEC staff to continue to follow the mandates that Chair White has championed unless and until a new chair signals a definitive change in direction.”
In a separate post, the attorneys commented that “while there remain many unknowns about President-elect Trump’s administration, it is fair to assume that the SEC, for one, is sure to look—and perhaps act—much differently.”
This article was edited for LexisNexis by Tom Hagy, managing director of HB Litigation Conferences and former publisher of Mealey’s® Litigation Reports.