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A reader who has held senior roles in the investment industry was so disturbed by what he heard at a securities conference that he had attended that he sent an audio recording of most of the session to me. When I concurred with his reaction, he took it upon himself to add a video component, including a running transcript, to make it more accessible.
The event was a securities law conference that took place in May. The panel in question consisted mainly of current and former SEC officials. I’ve made the video public today on YouTube and strongly encourage you to watch it in full. There’s enough troubling material in it that we’ll discuss it today and tomorrow.
What this discussion reveals is the degree to which the very premise of the SEC’s role, and that of regulations generally, is under intense assault by the private bar. One Washington insider called it legal corruption, in that lawyers are taking issue with the very premise of the rule of law in order to advance their and their clients’ interests. And when I went to get reactions from law professors, they saw this as normal. As one wrote, “Practicing attorneys, especially those who used to work with the SEC, always kind of beat up on the current staff.”
In fact, the reaction I got from attorneys who didn’t approve of the posture was that they knew that it was so widespread that getting exercised about it might make them look out of touch. For instance, as another law professor who had been a private securities lawyer earlier in his career wrote:
I guess I’m not too surprised….The use of words like “entrepenurial” reflects the echo chamber of partisan hostility, where trade groups reflect back cherry-picked sound bites to rile up their supporters and allies, in an effort to get political pressure going in Congress and other venues.
But as you look at the video, it’s not hard to see that the posture of the attorneys in private practice is openly dismissive, even bullying, and they do far more in the way of name calling than actually making substantive complaints that have merit. But you will also observe how defensive the SEC officials are. It’s not hard to see how years of this kind of browbeating has had an effect on the staff, even before you get to the lack of support for tough enforcement at the political appointee level of the agency.
For instance, one contact who has often attended conferences at which SEC officials make presentations pointed out the degree to which agency members have unwittingly given ground, rhetorically and psychologically, to their opponents by adopting their framing. One of the accusations regularly made against the agency is the Palinesque cheap shot that it’s “playing gotcha”.
Well, what is enforcement other than getting bad guys? Would anyone dare tell a cop that caught them speeding that he was “playing gotcha” in writing a ticket? You can pretty much guarantee that most officers would find a way to increase the sanction simply by virtue of a guilty party being so disrespectful of the law (I shudder to think what would happen to a black person who tried that line of argument).
Yet agency member wind up reinforcing this wrongheaded framing by invoking the “g” word in their efforts at rebuttal, both reinforcing the meme with third parties and likely reflecting their own internalization of that framing.
Today, we’ll focus on the opening section, which gives a good flavor of the tone of the entire panel.
David Bayless, Covington & Burling: Staff attorney getting an idea [inaudible] can have huge ramifications, extraordinary cost, extraordinary burdens, and so that’s where I worry a little about this supposed entrepreneurial idea that, just on a whim and an idea, people send out a subpoena.
Michele Wein Layne, SEC Los Angeles Regional Director: But I reject the notion that it’s just on a whim. I mean. People act rationally at the SEC.
Marc Fagel, Gibson, Dunn & Crutcher: It’s a rational whim?
Layne, SEC: It’s a rational whim?
But again, even like sending out that subpoena or ‘come hither’ letters or other sweeps of those nature, before those actions are taken there is decision-making and reviews because, as a government agency, we have very limited resources. So there’s nothing to gain by going in and doing that. Plus there is an understanding, appreciation, respect for the power of our subpoenas and what that means on the other side in terms of cost, reputational consequences, etc. So I don’t think they’re ever done on a whim or without very good cause and principle
Jordan Eth, Morrison & Foerster: So speaking of process, there’s this national task force on fraud and accounting fraud… So how does that affect what your office does? Because that’s based out of a different office, I believe.
Layne, SEC: Well it was originally headed by David Woodcock the regional director at the Fort Worth office who is leaving and is now headed by the person who was the co-head, Margaret McGuire in the D.C. But it does have representation on the task force across the regions including we’ve had somebody from our office, an attorney as well, we’ve previously had an attorney, CPA on the task force, and so as much as been discussed about that task force, it really is sort of an incubating task force to identify potential new matters and investigations and then get assigned out to the regions.
Eth (Morrison & Foerster): So “incubating” sounds a lot like “entrepreneurial”, but on the defense side do you see any results or any changes because of that taskforce? Mark?
Fagel (Gibson Dunn): I think it’s actually… I have a great deal of respect for how the program has gotten off the ground and it gets back to proportionality. I’ve had a few [inaudible] rough encounters with the taskforce. And it has been a more modified way for taking a look, kicking the tires, triaging what may or may not be an action. So I think that model is very successful. You don’t get 20 subpoenas on the first day. You have meetings, talk, and sometimes the staff realizes there’s nothing there, sometimes they escalate and I think it’s a really good process. So I don’t have any problem with it. What they do later…
Randall Lee, WilmerHale: I think that it does create an opportunity and one of the challenges that, in any case, when the subpoena shows up, the request shows up, you never really know what the source is, you don’t really know what the degree of seriousness is, you don’t know how or whether it’s just a kick the tires kind of exercise or if it’s something specific to your client. Part of the challenge in the very early days is to try to figure out, ok, ‘what does this mean? Is this something that’s the result of a data analytics kind exercise? Is it the result of a sweep? Is it the result of a specific complaint related to this company?
Eth (Morrison & Foerster): Can you find that out, Randy?
Lee (WilmerHale): You know, sometimes we can, sometimes we can’t. It can be very frustrating. Now that I’m on this side of the table, I’ll say one of the biggest challenges and biggest areas of frustration is… if your client – which is an entity – and wants to do the right thing and want to know if there is some ongoing misconduct of one of its employees and recognizes that’s the responsible thing to do. You need some information from the government, from the SEC in order to deal with it and look into these things. And I’ve had any number of circumstances where the SEC is just a black-box and they won’t share anything, presumably for legitimate reasons, but it can put companies in a very difficult position.
Fagel (Gibson Dunn): Depends on staff attorneys. Sometimes you get the black-box, sometimes you get some—Alright, let me explain exactly what’s going on. It helps if you get the redline—In the Matter of Certain Illegal Actions. You may end up that they’re looking at a whole bunch of stuff. And it’s not naming your client. But it’s very dependent. Some staff will tell you an awful lot, but some can’t tell you anything—here’s what we do.
Here I will turn the mike over to Akshat Tewary:
By Akshat Tewary, an attorney and member of Occupy the SEC, and one of the lead authors of the amicus brief in support of Judge Jed Rakoff in SEC v. Citigroup
This enforcement panel illuminates the uphill battle that regulators face.
The SEC has a limited budget that has not grown commensurate with its responsibilities under Dodd-Frank. The agency also suffers from a high level of employee burnout, and the revolving door to industry is well-lubricated. So the agency is already fighting with one hand tied behind its back. To make things worse, agency officials routinely attend such conferences and panels filled with defense attorneys, industry lobbyists, pro-industry academics and politicians who take the agency to task for simply doing its job.
Here the defense bar is complaining about an increasing level of “unfairness” during SEC enforcement actions. But the examples they give are poor. For instance, one panelist mentions that agency officials have stopped leaking announcement to defense attorneys ahead of time, and chalks that up to “unfairness.” But he fails to explain why “fairness” requires the SEC to risk undermining its own effectiveness or legal position. An SEC enforcement action is an adversarial proceeding. It is possibly malpractice, not mere “fairness,” for an agency attorney to weaken his/her case against a potential defendant by leaking information to defense attorneys. Actual “unfairness” involves not giving a defense attorney enough time or information to properly formulate a defense, but there was no real evidence of that presented in the panel.
I have attended many such conferences. At almost all of them the SEC official is placed on the defensive by pro-industry attendees and panelists. The cumulative effect of these meetings cannot be ignored. Panelists from the SEC (even if they didn’t have one eye towards their post-government careers) probably cannot help but be influenced, at least partly, by the volume of “vitriol” levied at them at such events. And let’s not forget that agency officials are daily buffeted with disproportionately one-sided comment letters and presentations from pro-industry lobbyists. Given these factors we should not be surprised to see regulations watered down and enforcement proceedings settled with no real accountability.
Second, the panel highlights some fundamental misconceptions about the mission of the SEC. Some of the panelists seemed to be of the opinion that the SEC should allow industry to self-regulate, with the agency spritzing some regulatory oil here and there to de-gunk market structure. That view is, of course, just plain wrong. Jina Choi more accurately describes what the SEC views as its core mission: protecting investors and promoting efficient and well-capitalized markets.1 Even so, this second view also strays from the SEC’s actual mission, as laid out in the Act that created the agency: the Securities Exchange Act of 1934 (the “1934 Act”).
The first page of the 1934 Act (at Section 2 “NECESSITY FOR REGULATION”) explains why the Commission was created and what its objectives were. Today the SEC routinely claims that its objective is only to protect investors, and not the general public – in fact, certain SEC attorneys have told us this directly during our discussions with them. But that claim is belied by the actual text of the 1934 Act, the second sentence of which acknowledges that securities transactions affect the “national public interest” (and not merely the interest of shareholders).
Contrary to the passive role that the SEC believes it must play, the 1934 Act actually gives the agency a sweeping mandate, which includes a number of defined objectives that well exceed the mere protection of shareholders:
• Protect interstate commerce,
• Protect the national credit,
• Protect the Federal taxing power
And perhaps the agency’s most interesting objective is stated in Section 2(4):
Reduce “[n]ational emergencies, which produce widespread unemployment and the dislocation of trade, transportation, and industry, and which burden interstate commerce and adversely affect the general welfare, are precipitated, intensified, and prolonged by manipulation and sudden and unreasonable fluctuations of security prices and by excessive speculation on such exchanges and markets, and to meet such emergencies the Federal Government is put to such great expense as to burden the national credit.”
Yes, the SEC (and not just the Federal Reserve) is supposed to concern itself with reducing unemployment. It must take an active role in reducing excessive speculation. And it must concern itself with “the general welfare.” Congress said so.
The SEC is a highly technocratic agency that has unfortunately lost the forest for the trees. In focusing excessively on the minutiae of how securities markets actually operate, it has come to ignore the fact that Congress expressly required it to consider the public’s interest and not just that of shareholders.
1 See SEC.gov, The Investor’s Advocate: How the SEC Protects Investors, Maintains Market Integrity, and Facilitates Capital Formation, available at http://www.sec.gov/about/whatwedo.shtml (“The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.”)