Washington is a political city, so by definition the Securities and Exchange Commission will be influenced by politics. But how bad is it these days?
So bad that even complaining about politicking within the SEC is getting, well, political.
Consider the case of U.S. Rep. Scott Garrett, a New Jersey Republican and no fan of the SEC. At a congressional hearing in March, he zinged SEC Chairman Mary Jo White with this: “Some have asserted that the SEC is becoming more political and distracted from its core mission. By my count, during your first two years as chair, the Commission has already had 10 partisan, 3-2 votes on major agency rulemakings.”
By the end of August, that tally of votes split along party lines had hit 16. Sure, Garrett’s numbers are accurate—he just neglected to mention that most of those 3-2 votes involved the dissent of Dan Gallagher and Michael Piwowar, Republican appointees whose objections he would likely agree with.
The public statements accompanying dissenting votes have also become more divisive. Piwowar, objecting to the pay ratio disclosure rule adopted in August, dug deep into the conservative playbook to decry it as an example of “Saul Aliskyian tactics by Big Labor.” He also took the rare step of issuing a lengthy second statement, detailing why he believes the SEC violated the Administrative Procedures Act. The precise language of the document, supplemented with abundant footnotes and case law references, reads more like an amicus brief for an as-yet-unfiled lawsuit than the standard commentary of commissioners.
The politics of dissent is not one-sided. Commissioner Kara Stein, a Democrat, has blasted White over granting “bad actor” waivers to large financial institutions. Luis Aguilar, also a Democrat, has bickered with Gallagher over what he sees as unfounded concerns about CCO liability in enforcement actions.
“This public airing of the Commission’s dirty laundry is new,” says Scott Kimpel, a partner with the law firm Hunton & Williams and former counsel to SEC Commissioner Troy Paredes from 2008-2012. “In the past, there was a sense that they would keep this stuff behind closed doors for the good of the agency, because to publicly air grievances undermines its authority and creates the public perception that there is chaos among the ranks.”
It isn’t just a hazy recollection of the “good old days” that makes the current Commission seem so dysfunctional. Prior to 2000, 4-1 votes were rare and 3-2 votes nearly unheard of. Former chairmen often horse-traded their way to a unanimous vote and would sidestep proposed rules that couldn’t muster at least a 4-1 approval. During Commissioner Harvey Pitt’s tenure, for example (2001-2002), more than 2,000 votes yielded a mere 14 dissents.
“This public airing of the Commission’s dirty laundry is new. In the past, there was a sense that they would keep this stuff behind closed doors for the good of the agency.”
Scott Kimpel, Partner, Hunton & Williams
Kimpel recalls a former commissioner telling the story of how he objected to a particular rule and planned to go public with his displeasure. “The chairman talked to him and said, ‘For the good of the agency, we really can’t have this sort of thing going on. Will you take one for the team?’ This commissioner went along with a rule that he probably didn’t like, but he put the public perception of the agency and its reputation ahead of whatever individual concerns he had. That just seems impossible now.”
There should be no suggestion, however, that the SEC was always a place for perpetual agreement and Mayberry-level cordiality. Former Commissioner Roberta Karmel (1977-1980), now a professor at Brooklyn Law School, was frequently on the “1” side of 4-1 votes. “Sometimes when I see what’s going on now, I’m sorry I ever dissented on anything,” she says.
Karmel recalls that the first time she decided to dissent in a rulemaking proceeding, she was actually told there was no procedure for doing so. She rarely dissented in rulemaking proceedings, however, focusing her scrutiny on enforcement cases, few of which were public.
TAKING A SWING
The following are some recent, and notable, examples of SEC Commissioners making their displeasure public through public statements.
“Today’s action is nothing more than a sad example of surrendering the Commission’s agenda to politically-connected special interests and acquiescing to the bullying tactics of their political allies. Remember what we learned in school. Acquiescing to bullies only gives them more ammunition and makes it worse. And, yet, Commission leadership seems content to invite further blows. What will come next? Perhaps it will be political spending disclosure. Perhaps it will be share buyback prohibitions. To be sure, today’s action ensures that the Commission’s bullies will be back for more. It is undoubtedly too late to convince a majority of my fellow commissioners to end this losing strategy of appeasement.”
—Commissioner Michael Piwowar: Dissenting Statement at Open Meeting on Pay Ratio Disclosure (August, 2015)
“At the end of the day, each of us as Commissioners should hope that we are able to leave the Commission a little better than it was when we first arrived. Thanks to the decisions that have been made about which rules to take up and how to pursue them over my 4-year tenure—decisions unfortunately outside my control—I regretfully can’t say with certainty whether that will be true, for me, with respect to the agency’s policymaking record. With this vote, I will have cast 16 ‘no” votes on major Commission rulemakings, which I think is a Commission record. Yet this is the hollowest of achievements for me. Those votes represent 16 proposals or final rules that I could not in good conscience approve, because they do not stay true to our mission—rules that fail to protect investors, that degrade our markets, or that inhibit capital formation. This rule highlights the sad fact that, over five years after Dodd-Frank, the Commission is still wandering through the wilderness, and that the voice of one or two minority Commissioners crying out in that wilderness can do little to put us back on the right path.”
—Commissioner Daniel Gallagher: Dissenting Statement at an Open Meeting to Adopt the “Pay Ratio” Rule (August 2015)
“I am concerned that Commission Orders may, at times, be purposely vague and/or incomplete, and written in a way so as to lead the public to conclude that no fraud had occurred. When this happens, the public is denied a full accounting and appreciation of the egregious nature of a defendant’s misconduct. In addition, this practice muzzles my voice by not allowing any statement by me (including this dissent) to include a fulsome description of facts that support the view that the Commission should have brought fraud charges. This adversely impacts my ability as a Commissioner to provide the American public honest and transparent information—including a description of facts discovered by the staff during its investigation. In the end, these behind-the-curtain decisions can make fraudulent behavior appear to be an honest mistake.”
—Commissioner Luis A. Aguilar: Dissenting Statement In the Matter of Lynn R. Blodgett and Kevin R. Kyser, CPA, Respondents (August, 2014)
“My debates at the Commission table with the enforcement staff became legendary, and often degenerated into shouting matches,” she has written. “This was an extremely macho group used to investigating and terrorizing Wall Street and even some SEC commissioners.”
A turning point for inter-commission relations came in the early 2000s. Despite being an appointee of President George W. Bush, Chairman William Donaldson (2003-2005) had so many disagreements with Republican commissioners that he often had to caucus with his Democrats to pass new rules.
Commissioner Paul Atkins was a perpetual roadblock for Donaldson’s agenda, notably opposing rules to regulate hedge funds and require mutual fund boards to have independent chairmen. His and Commissioner Cynthia Glassman’s written dissent statements were referenced by the U.S. Chamber of Commerce when it sued over the mutual fund rule. Famously, Atkins went on the warpath when an appellate court sent a package of investment company governance amendments back to the Commission, and the commissioners repackaged and voted on the rules again just eight days later.
“Even under normal circumstances, the Commission could not conduct a meaningful analysis within eight days, as the majority claims it has done,” Atkins wrote. During the eight-day period at issue, he said, the commissioners and their staffs moved to a new headquarters building, and two commissioners spent a fair bit of the week outside the country. “Before the ink on the Court’s opinion was even dry, the die was cast for the predetermined result of the Commission’s deliberations.”
Kimpel blames the Dodd-Frank Act for recent tensions on the Commission. “It was the first major amendment to the federal securities laws that was not bipartisan,” he says. “Every other securities law that has ever been passed, including Sarbanes-Oxley, has had a large, bipartisan majority supporting it. You have two Republican commissioners who just fundamentally disagree with the premise of the statute.”
Another troubling trend is that recent chairmen have felt the need always to caucus with the commissioners from their party. “Once it becomes clear that one group can’t get behind a rule, the chairman feels political pressure to get things done in a way that fits with the administration’s agenda,” Kimpel says.
Karmel suggests the process for choosing new Commissioners should be reconsidered. With greater frequency, Capitol Hill staffers—Senate Banking Committee staffers in particular—are chosen as SEC commissioners. “This is not the route that used to be taken,” she says.
“Most of the commissioners used to be lawyers with a reputation in the field, and there just wasn’t this kind of partisanship,” Karmel continues. “When you get a mix of commissioners with experience on the Hill they come to the SEC and continue with what’s gong on in Congress. It is very unhealthy.”
While some argue that the so-called “revolving door”—from private sector to the Commission, and back again—undermines agency integrity, Karmel believes the longtime practice is preferable to a congressional talent pipeline.
“Political dysfunction makes the SEC’s job, difficult in any event, even more difficult,” Karmel says. “Not only do you have this division among the commissioners and dissents being written as if they are plotting a way to attack the rule in the courts; the courts have also become very partisan, especially in the D.C. Circuit, so some of these attacks succeed.” That, in turn, makes every rule a slow exercise in legal bullet-proofing.
“Once you get this kind of a dynamic it is very hard to turn it around,” she lamented.
Alas, things are not likely to improve any time soon. Gallagher and Aguilar both plan to leave the SEC as soon as new appointees are confirmed by the Senate. The nominations? Tied up in Senate politics.