In three recent addresses SEC Chair Mary Jo White has given definition to her vision for the agency. In one, she discussed Enforcement policy (here). A second focused on market structure (here). In a third, titled The Importance of Independence, delivered to the 14th Annual A.A. Summer, Jr. Corporate Securities and Financial Law Lecture, Fordham Law School (October 3, 2013) (here), Ms. White focused on the meaning of being independent. While many of her comments on independence reiterate the basics, her views on the settlement of enforcement actions are significant.
“Under the law the SEC is an independent agency . . . “ Ms. White began. That “does not mean that the SEC does not listen to the ideas and recommendations that come from beyond our building. Indeed, we depend upon hearing and evaluating the ideas and recommendations of those who will be impacted by our rules. . . At the end of the day, however, we make our decisions based on an impartial assessment of the law and the facts and what we believe will further our mission. . . “
With this preface Ms. White outlined her view of independence in three contexts: 1) political; 2) rule making and 3) enforcement settlements. Drawing on her experience as a U.S. Attorney, Ms. White stated that while Commissioners are appointed through the political process, their job is to make decisions on the facts, implementing the mission of the agency. The SEC, Ms. White declared, has a strong tradition of being independent of the political process. In support of this point she cited examples of actions taken by former Chairman over the years.
Independence comes not just from inside the SEC’s building however. Rather, it “should be respected by those outside, including the industry, other agencies, Congress and the courts.” In the context of rule making this means that “the agency’s unique expertise – should be, for example, respected by those who seek to effectuate social policy or political change through the SEC’s power of mandatory disclosure. “
It is essential in implementing disclosure policy that the agency “shape disclosure rules consistent with the federal securities laws and its core mission.” In some instances Ms. White stated that she may question if the Commission’s disclosure mission should be utilized to implement policy. One example is the Dodd-Frank mandate that the agency write disclosure rules regarding conflict minerals. While Ms. White allowed that this may be good social policy, she questions using the federal securities laws as a mechanism to implement it.
Nevertheless, “I recognize that when Congress and the President enact a statute mandating such a rule, neither I nor the Commission has the right to just say ‘no.’” We cannot say that a law does not comport with our mission as we see it. . . .” Rather, the question is what leeway the law affords the agency in writing the rules. It is the responsibility of the agency to utilize its expertise within that context, according to the SEC Chair.
Finally, Ms. White “urge[d] the courts to defer to the SEC’s independence and expertise.” This means in the first instance the deference that is due under decisions such as Chevron.
Turning to the question of requiring admissions as part of a settlement while declining to comment on any pending cases, Ms. White reiterated the parameters of her new policy. In select instances the Commission will demand admissions a part of the settlement of an enforcement case. At the same time the “neither admit nor deny” formulation will continue to be an important tool in resolving those cases. The decision to either policy is one for the agency in its discretion, not the courts Ms. White stated. Acknowledging that under the law the court can review a settlement, its role is limited: “A court reviewing a consent judgment in one of our cases has a narrow focus – making sure that the settlement is not ambiguous and that it does not affirmatively harm third parties or impose undue burden on the court’s own resources.”
The notion that the SEC is independent and should make decisions based on the merits and not on politics is axiomatic and fundamental to its core mission. Equally clear is the fact that the SEC is obligated to write rules within the context directed by the statutes written by Congress and signed by the President. As Ms. White noted, regardless of the personal views of Commissioners on the wisdom of certain statutory directives, it is the responsibility of the agency under the law to write the rules as directed.
Less clear, however, is Ms. White’s vision of the court’s role in effectuating an enforcement settlement. The basic premise that the implementation of agency policy is within the sound discretion of the regulator should not be controversial, although that issue may be given new definition when the Second Circuit resolves the pending Citigroup case on the role of the courts in SEC settlements (here). Accordingly, the question of whether admissions should be sought or the settlement can be effected on a neither admit nor deny basis should typically fall within the discretion of the agency. Stated differently, whether one settlement policy or another is employed should generally be reserved to the discretion of the agency.
At the same time it is difficult to view the court’s role as limited to little more than proof reading, checking to see that the papers are clear and ensuring that the arrangement will not cause harm or be burdensome. As Judge Gleeson remarked in holding that the court had authority to approve a deferred prosecution agreement in U.S. v. HSBC Bank USA, N.A., Case No. 12-cr-763 (E.D.N.Y. Order dated July 1, 2013) (here), it is the parties who chose to file the case with the court and invoke its authority. It is the parties who came before the court and asked it to take certain actions. In taking those steps the parties submitted themselves to the authority of the court and its supervisory powers.
This is particularly true of most Commission enforcement settlements. In those cases it is the SEC that invokes the jurisdiction of the court by filing the action. Likewise, it is the SEC requesting that the court enter certain orders which can then be enforced through its contempt power. Viewed in that context the Court cannot be reduced to what Judge Gleeson called – citing a now famous statement – a potted plant.
For more commentary on developing securities issues, visit SEC Actions, a blog by Thomas Gorman.
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