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09 Jun 2017
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The SEC Under a New Reign

“DSC_4880 – Securities and Exchange Commission” by Scott S. licensed under CC Attribution 2.0 Generic. Modified by Guzov, LLC.

Early in May 2017, Jay Clayton was sworn into office as the 32nd Chairman of the Securities and Exchange Commission. New administrations bring change, perhaps not in regards to the SEC’s ultimate objectives, but in the process of enforcing SEC regulations. Robert Khuzami, spent four years as the director of enforcement at the SEC during the aftermath of the 2008 financial crisis. During an interview with Corporate Counsel, he gives insight into how enforcement measures change from one administration to the next. Khuzami asserts that it is not a change of an administration that impacts regulation, but instead budget constraints. Administrations regularly turnover, but every Chairman of the SEC will have the same two-fold goal of: 1. enforcing penalties on companies who commit illicit activities and 2. maintaining a fair and efficient market for consumers.

During Mary Jo White’s term as the 31st SEC Chairwoman, disagreements arose regarding penalties and when waivers should be approved (as opposed to the substance of whether there was a breach of the SEC’s regulations). Before Mr. Clayton was sworn in, he hinted that he would reduce penalties since “shareholders do bear those costs”. However, commentators worry that lower monetary fines will fail to deter companies’ illicit behavior as the SEC’s authority is already wavering. Recently, in Kokesh v. SEC, the Supreme Court limited the SEC’s disgorgement order to fall within the 5 year statute of limitations for civil penalties.

The real problem eating at the SEC’s efficiency is that the agency is outnumbered and under budget. The SEC has 1,300 employees in the enforcement division, who are far outnumbered by the countless financial institutions, investment advisers, broker-dealers, public companies and securities traders under its purview. Budget constraints directly affect agencies like the SEC.  Events including the recent hiring freeze limited the SEC’s manpower as people left their positions and could not be immediately replaced. The question for Mr. Clayton’s administration is how the SEC will balance their authority and potential future restrictions imposed by the Supreme Court and the legislature. Furthermore, how will the new administration allocate the budget in light of the budget cuts to the agency? If the SEC continues to work more closely with firms and devolve a portion of its duties, they could establish stronger relationships and help firms efficiently tackle problems at the first instance, without using SEC resources.

Khuzami predicts that in light of the prior administration’s focus on “first-ever cases” the new administration will probably be more vigilant in this regard. Transparency and communication is a key concern amongst companies. The new administration must ensure that it effectively communicates what types of behaviors are permitted through guidelines, speeches and investigation reports from other firms. This includes potential amendment and reinterpretation of the Dodd-Frank Act, the set of reforms implemented in the aftermath of the 2008 financial crisis to prevent future crises. The legislation facilitated the recovery of financial institutions, but now as the economy continues to strengthen, it would be appropriate to review what provisions are still necessary and if any need amending. Khuzami explains that “a wholesale abandonment of Dodd-Frank is [not] wise, but a close examination of certain provisions is certainly appropriate.” However, yesterday afternoon, on June 8th, the House of Representatives approved the Financial CHOICE Act, repealing many of the financial regulations imposed on banks.

In the days leading up to Clayton filling the position as Chairman of the SEC, the agency awarded two whistleblowers over $4 million collectively. Khuzami predicts that this will be an area we see change in as whistleblower regulations should be reviewed and amended. For instance, instead of whistleblowers reporting directly to the SEC, it could be mandated that they report the issue in-house first. This would create an efficient process of devolution for the SEC, giving in-house counsel the responsibility to assess the situation first and weed out potential whistleblowers who are motivated by personal gain. Members of Congress are even deliberating whether co-conspirators, who report illicit activity to the SEC, should receive a benefit. Khuzami says this would create the biggest impact in regards to whistleblowers as “individuals engaged in wrong-doing … make the best whistleblowers because they may have the greatest access to knowledge about the scheme.”

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