(The opinions expressed here are those of the author, a
columnist for Reuters.)
By Alison Frankel
NEW YORK Dec 7 There's been a lot of talk since
the election about dismantling the Dodd-Frank financial reform
act. On his website, President-elect Donald Trump blames
Dodd-Frank's "bureaucratic red tape and Washington mandates" for
strangling economic growth.
The chairman of Trump's panel of business advisers,
Blackstone CEO Steve Schwartzman, said at a Goldman Sachs
conference Tuesday that the president elect expects to effect
the biggest financial regulatory roll-back in decades.
I've been wondering how the Trump administration's
Securities and Exchange Commission will approach enforcement of
the securities laws. As you probably recall, the SEC was
scapegoated in the years after the 2008 financial crisis for
failing to investigate and punish banks that promoted risky
mortgage-backed securities and, in some cases, profited from the
collapse of the housing market.
But as the pendulum swung toward more stringent enforcement,
defendants criticized the SEC and the Justice Department for
extracting billion-dollar penalties that were, at least as
defendants saw it, unmoored from actual violations.
Enforcement defendants and their lawyers have also spent the
past few years complaining bitterly about the SEC's increased
use of administrative proceedings - which take place before
in-house judges, under rules set by the agency - instead of
federal court enforcement actions. When the president-elect's
appointees take control of the agency, will they continue to
capitalize on the procedural advantage Congress authorized in
RETURN OF THE FINANCIAL CHOICE ACT?
At a seminar I attended last week, white collar defense
partner David Meister of Skadden Arps Slate Meagher & Flom
suggested a starting point for thinking about SEC enforcement in
the Trump era: the House Financial Services Committee's
Financial Choice Act, which passed a committee vote in September
but never made it to the House of Representatives.
Meister cautioned, of course, that we don't know which, if
any, of the bill's proposals will make it into law. Nor has the
president-elect named his nominee to head the SEC. At the
moment, in other words, we can't be sure how the agency's
enforcement strategy and tools will change.
That said, Representative Jeb Hensarling has made it clear
that he plans to reintroduce the Financial Choice Act in the
He has also met with President-elect Trump, before and after
the election, to discuss his ideas for retooling Dodd-Frank,
which include changes to the structure of the Consumer Financial
Protection Bureau and repeal of the Volcker Rule on proprietary
trading, among many other things.
The president-elect's website echoes the Financial Choice
Act's language on Dodd-Frank and financial reform, which
suggests the future Trump administration takes the proposed law
So what does the Choice Act have to say about SEC
enforcement? The law talks about holding Wall Street and
Washington accountable if there's another financial crisis and
proposes a higher ceiling on penalties the SEC is permitted to
impose for the most serious violations of securities laws.
RESTRICTING THE SEC'S LEVERAGE
But at the same time, the bill would severely restrict the
SEC's ability to punish public companies. In order to impose
penalties, the proposal would require the agency to prove that
the alleged violation directly benefited the accused issuer -
and that shareholders in the company won't be harmed as a result
of the penalty.
"The SEC must strike the right balance between deterring and
punishing securities fraud and protecting shareholders
ultimately responsible for paying large civil penalties for
violations they did not commit," the law's summary explained.
The Choice Act would also weaken the SEC's negotiating
leverage by restricting the commission's ability to threaten
automatic disqualification from regulated activities.
According to former SEC Commissioner Dan Gallagher, a
Republican appointee, the agency historically used automatic
disqualification of individuals and institutions to prevent
repeat securities violations. Large institutions typically
received waivers from automatic disqualification, Gallagher said
in a speech in February 2015, but in recent years, the automatic
disqualification system - and supposedly punitive use of the
waiver process - has become a way to enhance sanctions,
He argued that disqualification should not be conflated with
sanctions, and the House Financial Services proposal agreed. The
Choice Act would eliminate automatic disqualifications and give
the SEC discretion to tailor disqualifications to punish "the
Administrative proceedings will be significantly curtailed
if the Choice Act goes through. The law would allow SEC
defendants to remove their cases to federal court, even if the
SEC files the case as an administrative proceeding.
It would also allow defendants to present arguments to the
commission before the SEC institutes an administrative
proceeding and would put in place an ombudsman to review
complaints about the entire enforcement program.
I presume a cooperative SEC chair could institute many of
the Choice Act's proposals even without the law passing. It's up
to the commission, for instance, to pick a jurisdiction for
enforcement actions, so a new chair and enforcement director
could simply send cases to federal court rather than to
administrative law judges.
The agency could also revise its internal guidelines on
assessing penalties and imposing disqualification, regardless of
the fate of Representative Hensarling's proposed law.
Defanging the agency charged with assuring market integrity
is a risky move, especially for a president elected as a
SEC enforcement is one of those areas where the interests of
small-time investors and large corporations don't necessarily
coincide. We haven't had a financial crisis since Dodd-Frank was
enacted. Let's hope that streak continues.
I left a message for Sharon Brown-Hruska of NERA Economic
Consulting, who has been appointed to President-elect Trump's
landing team at the SEC (and two other regulatory agencies). She
did not respond.
(Reporting by Alison Frankel. Editing by Alessandra Rafferty.)