Earlier this month, we excerpted a section of a panel discussion from an SEC securities enforcement conference. It showed the degree to which former senior SEC officials who’ve gone into private practice openly ridicule the idea that the SEC should do its job, for instance, by deriding enforcement as “gotcha”.
Today, we’ll look at the panelist who was most aggressive in attacking the SEC, Helane Morrison, the general counsel of a fund manager targeting the super-rich, Hall Capital. You’ll see Morrison repeatedly take positions that are hostile not just to the SEC, but to the interest of her firm’s clients. And this was not just my reaction. From a senior member of the investment industry who has had extensive dealings with Hall Capital and has met Ms. Morrison*:
Ms. Morrison’s comments constitute a betrayal of the people whose interests she holds in trust, which are the clients of Hall Capital. These individuals entrust their life savings to Morrison’s firm in the belief that Hall Capital will act as a careful steward of the funds and, implicitly, that Ms. Morrison, as the firm’s general counsel, will act as a vigorous advocate for their financial interests. Instead, we see that she embraces a highly ideological anti-government, anti-enforcement agenda that leaves investors naked and powerless at the hands of those who would cheat them. This attitude is fundamentally incompatible with the role that Ms. Morrison is charged with as the chief counsel at a fiduciary investment adviser, and she should seek work elsewhere that is better aligned with her world-view.
Depicting Morrison as an ideologue who has allowed personal bias to trump her duties as general counsel is an unduly charitable interpretation of what is really going on.
It’s hard not to surmise that Morrison has unwittingly let the cat out of the bag: that Hall, despite positioning itself as being more customer-focused than others players fighting for private bank business, in fact is far more loyal to its own bottom line. Thus the over-the-top attacks appear to stem from Hall defending its private equity and hedge fund products, areas where the SEC has repeatedly found serious violations, including stealing (taking fees to which the managers were not entitled), misvaluation of assets and misleading representation of past performance.
Hall, by putting investor funds in managers that have engaged in serious misconduct, may well be guilty of failing to do adequate due diligence and oversight. Recall that the SEC flagged that more than half of the private equity managers a a minimum had made serious compliance violations, and contrary to its experience in other fields, the scamming was more prevalent at the largest firms. SEC chairman Mary Jo White more recently has made stern statements about a range of misconduct the SEC found at hedge funds. That means it is virtually certain that Hall has put client assets in funds that have at least mislead and may well have cheated investors. No wonder Morrison is so eager to discredit the SEC any way she can.
In addition, any player in the investment management business knows it is held to the standard of being a fiduciary, meaning it duty-bound to place its clients interests above its own. It’s thus troubling to see a senior officer at a fiduciary, even worse, one who clearly knows better, effectively put herself on the side of the perceived right of purveyors to cheat customers who are dumb or inattentive enough to let the investment firm get away with it. In other words, her very act of opposing strong regulatory oversight and investor protection is arguably in and of itself a breach of fiduciary duty.
Background on Hall Capital and Helane Morrison
Hall Capital Partners is a fund management firm that targets the super wealthy. It was founded in 1994 by Kathryn Hall, a former Hellman & Friedman parter whose predecessor venture was staked by Warren Hellman. Its minimum commitment was originally $25 million; it is now believed to be $75 million.
As is typical for firms that serve the high and super-high net worth market, Hall makes its fiduciary role a point of pride:
Transparency. We are a proudly independent firm – employees own the majority of the company and we believe deeply in putting clients’ interests first.
Hall provides a wide range of investment products, including hedge fund and private equity investments. The private equity portfolio does not appear to be run in-house; Hall has sponsored private equity fund of funds that invest in externally managed private equity funds and is ranked 27 on a recent list of fund of fund managers. As we’ve pointed out, private equity fund of fund managers need to play nice with the general partners so to have access to their wares, since virtually all fund of fund managers claim that they have superior access to private equity funds. The same incentives clearly apply to fund of fund managers in other “alternative investment” asset classes: you need to play nicely in the sandbox just to maintain a competitive standing.
Morrison has a stellar resume. She graduated from UC Berkeley’s law school and clerked both for Richard Posner** and for Supreme Court Justice Henry Blackmun. She worked for the SEC as the head of its San Francisco office from 1999 to 2007. She is also a member of the hedge fund subcommittee of the American Bar Association (ABA) But as a lawyer familiar with the landscape points out, “Generally, ABA folks argue for clients while trying to look objective, statesmanlike and policy-oriented. The ABA is a decorative veneer for client arguments.”
In other words, if Morrison makes an argument that does not seem credible, it’s unlikely to be out of ignorance. It is presumably a rhetorical choice.
Morrison at the SEC Compliance Seminar
Both of Morrison’s extended sets of remarks were noteworthy by virtue of staking out the most SEC-hostile position of any of the panelists. Bear in mind that she was the only ex-SEC official on the panel who now works at a fiduciary; the others are at major law firms. It’s one thing to cop an aggressive ‘tude when you are a litigator seeking to impress peers and prospective clients with your toughness. It’s another when you are working for an investment manager when a top concern from a commercial and legal perspective should be to protect your customers’ interests.
Here is the first segment:
Helane L. Morrison, Managing Director, General Counsel, and Chief Compliance Officer of Hall Capital Partners: I think, for discussion, I think that cyber security is definitely an area of concern. And I appreciate that the SEC has come out with–Investment Management came out with a paper about things that registrants may wish to consider. And the cyber-security exam sweep summary told about percentages of firms that are doing various things, but my question is: does something like that become an enforcement issue if your firm is not doing what is suggested or what some percentage of other firms does?
Michele Wein Layne, SEC Los Angeles Regional Director: I mean, I wouldn’t think so. I think the theme that emerges on the O.C. side and looking at the policy and procedures at the core is one of reasonableness. So there can’t be an across the board rule because just like with compliance procedures, they need to be reasonably tailored to the nature of the business, the risk of that business, the risk of that particular firm. And so like with all things, it really is a reasonable test based on the facts and circumstances
Morrison: But why should the SEC be suing someone if they think their cyber security is unreasonable? Where in the securities laws do cyber security come in?
Layne: Well it comes into rule S.P. for customer protections and then the amendment to that rule where you do have to have policies and procedures to protect against security breaches as well as protect the customers’ privacy.
Morrison: But I think that’s my concern. I’m sure that everyone has policies and procedures, but they may not be good enough, you know?
Layne:The question is what would be reasonable under the circumstances. And everyday, as lawyers, you try to make the best assessment you can, not just with the benefit of hindsight, but at the time did the firm, in good faith, create a system of checks and balances, policies and procedures that were reasonable to detect or prevent the violation or the breach?
Morrison: And the SEC is some expert on what’s required?
Now, now this would…
That’s my question.
Jordan Eth, Morrison & Foerster : Let’s switch topics…
There is more to this than might seem obvious. If you listen to this section, you can here how skeptical Morrison is. And as a former SEC official, she clearly knows that the SEC is fully within its rights, indeed duty-bound, to look into whether broker-dealers and investment managers have adequately protected customer assets. Her “Where in the securities laws does cyber security come in?” is thus tantamount to challenging one of the most established focuses of SEC regulation, and forcing an SEC official to defend basics, meaning principles that should be beyond question. Morrison refuses to relent, and then moves to questioning the SEC’s competence, when in fact there are many small brokerage and money management firms where the odds are not trivial that their controls are not up to snuff, particularly given the frequency with which major companies have been hacked. Even the moderator recognizes this as a cheap shot in cutting of the discussion.
Here’s the next exchange:
Morrison: Speaking as a registrant or from what I have heard from other registrants, I think there is concern about a gotcha mentality from the SEC and we have heard that in Boston, the office is reaching out and meeting with CCOs and general counsel, and that’s very appreciated. But I wanted to read to you what another regulator has done. This is the Federal Reserve Bank. They sent a personalized letter to our deputy chief compliance officer, “Dear so-and-so”. I am writing to thank you for completing the SHL report as of June 30th. The overall quality and timeliness of the SHL data you submitted was very good. We appreciate all of your efforts to provide high quality and timely data, as it is used for blah-blah-blah. If you have any questions, please contact us. That’s different, you know. That’s different.
Eth: Just a thank you note, just one thank you note.
Layne: Well we always say please and thank-you. And then, Jordan, I just reject the premise of your question that somehow our proceedings are constitute a deprivation of respondents/defendant’s rights. I also reject the notion that the SEC is now some kind of quasi-criminal enforcement agency. It’s a civil enforcement agency. Part of the mandate of a civil enforcement agency is to enforce its rules and to serve as specific and general deterrence. And that is a guiding principle and a consideration that is taken into the sanctions that we recommend against anybody that we sue. And one thing that I do think is very interesting—the dialogue that we have is very one-sided about the deprivation of the poor respondent’s rights. But sometimes what you see, and could be a reaction, for instance, in not giving notice of the press release days ahead of time is: no good deed often goes unpunished by the staff, and there have been numerous instances where, you know, trying to be reasonable with the other side comes back to bite us. And what we also don’t…isn’t in the discourse here and isn’t on a front page of the Wall Street Journal article are some of the tactics that are taken by defense counsel in some of our investigations, where we receive privilege logs for literally almost, in one case, every single document that the company was producing, where it takes months, sometimes close to a year to get the documents. Where you have company counsel coming in and representing every single witness, from the low-level employees to the CEO, in some cases, even the board. We see frequent assertions, dancing around reliance on privilege, but not an outright assertion of the attorney-client privilege. So we are hamstrung and have urged companies, if you have a genuine reliance-on-counsel defense, it’s in everyone’s interest to come forth to come forth and identify the facts and waive the privilege. So, we don’t want to bring a case if there is that defense. And, in our office, there actually was that defense raised and skirted around, and alluded to for two years, and finally, they took what we said in good faith, they actually came forward, told us what the advice was, and we closed our investigation. And that wasn’t through the fault of the staff that it took two years. The company just wanted to, you know, play it both ways, frankly until they got new counsel after two years and did the right thing. So, I think that just illustrates a little more insight into why some actions may seem punitive or retaliatory or unreasonable or unfair. It comes in a context of a lot of behavior that is engaged upon by defense counsel. Nobody in this room, but…other people.
Admittedly, Jordan Eth set up a witch hunt in this, the final section of the panel, with the patently false statement,”the SEC has become more of an enforcement agency, a quasi-criminal agency.” This is the SEC that after reporting it found ripoffs and serious compliance violations at more than half the private equity firms it examined, began walking back its tough talk within months and has only issued slap-on-the-wrist level fines for simple-to-document infractions.
Moreover, anyone with even a dim knowledge of the SEC’s history knows that the agency is a pale shadow of when it was respected and feared, in the 1970s, under enforcement head Stanley Sporkin. If these panelists think the current feeble rises to the level of “quasi-criminal” enforcement, they are defining “quasi-criminal” enforcement as the regulatory equivalent of handing out parking tickets.
Morrison’s demand that the SEC play deferential and cooperative is yet another protest against any enforcement at all. An enforcement relationship is adversarial. And holding up the Fed as relevant to the SEC is intellectually dishonest.
Morrison knows, or ought to know, that the Fed is a prudential regulator. A major part of its job is, or at least would be if it took it seriously, is to care that the firms it regulates are healthy. The SEC’s focus is much narrower. The SEC, unlike the Fed, was never charged with being responsible for assuring the safety and soundness of the firms it regulates. The SEC is tasked with assuring the integrity of securities markets, and its focus on the finances of the firms it oversees is limited to whether customer accounts are safe.
In addition, the Fed has correctly come under fire precisely for being unduly deferential to banks. One of many examples: Former Fed employee Carmen Segarra was fired after persisting in her efforts to remedy deficiencies she found during an examination of Goldman. Even though Segarra found multiple compliance shortcomings at Goldman, the tapes she recorded of internal meetings showed that bank-friendly superiors pressured her to weaken her reports and were all too willing to accept brush-offs or less than persuasive responses from the firm.
Last year Bill Dudley, a former Goldman partner and president of the New York Fed, admitted to Congress that a senior committee at the Fed overturned Segarra’s findings that Goldman Sachs lacked an adequate conflicts of interest policy, despite very strong evidence that that policy was woefully inadequate in comparison to competitor banks, and silent on the issue of firm-level conflicts.
Morrison appears unaware of the fact that Fed vice chairman Danny Tarullo has made great progress in reversing the very sort of chumminess that she tries to depict as a virtue.
It’s critical to understand that the securities and fund management industries have been engaged in a war of attrition against the SEC, and they’ve been wining to such a degree that they feel entitled, when the SEC dares to show a bit of spine, to try to beat it back into a crouch. As Akshat Tewary of Occupy the SEC wrote earlier:
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…
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
In other words, what Morrison and her fellow attack dogs are engaged in is not mere verbal sport. It’s yet another facet of the long-running ideological war over public versus private interest, and reveals one of the strategies by which the notion of profits uber alles has been legitimated. Yet again, we see how utterly one-sided the debate has become. Layne in her final exchange with Morrison has to (and does) maintain a veneer of reasonableness when dealing with loaded, innuendo-filled attacks, and is either too cowed or too risk-averse to dismiss them as petty, unfair, unreasonable, or flat-out misrepresentations.
And as we stressed at the outset, Morrison is proof that the investment industry has lost sight of its proper role. She is either so deeply invested in arguing for her firm’s interest over that of her firm’s clients that she has lost sight of any notion of balance, or else her aggressive anti-regulatory position is so common among her peers that she feels she is at no risk at being called out for selling out her firms’ clients. But at Hall Capital clients are highly prized. A small handful could pool their assets and set up their own investment management operation. They have no reason to stomach this sort of “investor protection is just too inconvenient” attitude.
Morrison’s remarks are a big wake-up call to Hall Capital investors. The smarter ones among them will hopefully get the memo and vote with their feet.
* This observer does not currently work for an investment management firm or a service provider to the investment management industry and hence is in a position to make an independent assessment.
* Having clerked for Posner does not establish that Morrison hews to his strongly conservative views. Unlike some Federal judges, who do make a point of selecting clerks who share their beliefs. As a law professor said via e-mail, “No assumption can really be made about ideology based on clerkships. Posner will hire 1-2 of the top GPAs from Chicago plus a Harvard and a Yale kid. The Chicago ones tend to be more conservative, but it’s not a rule.”