White Smoke at the SEC (Nov. 18)

Mike & Co.,

Among the many ironic aspects of the election outcome last week was the fact that only one person elected in 2000 saw the popular vote winner lose the presidential election that year and immediately proposed a reform of the electoral college: that year’s Senator-elect from New York, Hillary Clinton.

As many of us transition from the campaign to new roles in new institutions, we’ll keep providing updates in the current format for the time being.

And as the president-elect’s transition team undertakes the appointment of nominees to hundreds of senior federal posts, there has been a major resignation from the top of a key regulatory agency.

Below we consider whether other federal regulators will follow SEC Chair White out of town, review the SEC’s record under White, outline Trump’s options to fill the vacancy, and speculate on the future of securities regulation when the white smoke announces a Trump administration nominee to replace her.




Stepping Down | Trend Setting?

On Monday, SEC Chair Mary Jo White announced she would resign her post in January, three years before her term will expire.  The politically independent regulator was expected to leave regardless of the election result, but her departure may signal that other financial regulators could also leave early, some in response to last week’s elections.

  •  Martin Gruenberg at the FDICand Thomas Curry at the OCCeach have terms expiring mid-next year but may leave town early too
  •  FedGovernor Daniel Tarullo has until 2022 in office, but his proponents are worried he’ll step down early
  •  Christopher Giancarlo, the only Republican commissioner on the CFTCboard, is likely to become the chairman when Democrat Timothy Massad steps down in early 2017.  .

While others have hinted that they will step down, Fed Chair Janet Yellen says she will resist resigning if asked, but it appears unlikely Trump will do so.

White’s Record

It’s worth reflecting on White’s record, leading an agency tasked with broadly extending the oversight scope of Wall Street regulations covering new financial instruments and shadow markets pursuant to Dodd-Frank, with rules on money-market mutual funds, credit-rating firms, stock exchanges, and electronic trading platforms.

With the SEC facing modernization challenges and scandals, President Obama appointed White, a former US prosecutor in Manhattan who initially boosted staff morale at the commission.  She has taken modest steps toward enabling the Commission to track stock trades and catching fraud.  She also somewhat mitigated the Commission’s image problems following disclosure of its role in audits of conservative tax exempt organizations.

White’s tenure was marked by sharp criticism from both sides of the aisle. Republicans were upset with the rules created to implement Dodd Frank (rules  still not complete), while Democrats, led by Sen. Warren, critiqued White for not being tough enough on Wall Street.

But there are also a dozen rules that stand unfinished, and White has failed to draft language requiring financial advisers to act in their client’s best interest.  White has increased enforcement, as the agency brought a record 548 stand-alone actions just last year, but critics will say she went after jaywalking on the Street. White also forced them to admit guilt, instead of allowing the 100-year tradition of extracting monetary fines to suffice.

But large settlements continue to include exemptions and tax forgiveness provision in consistently high amounts that sister agencies have successfully reined in.  Under White, the SEC did bring the first actions against a ratings agency (Standard and Poor’s) and against a company (KBR Inc.) for confidentiality agreements intended to keep regulators in the dark.

White says she will continue to push forward an agenda over the next two months; priorities include the Consolidated Audit Trail, fleshing out Title VII of DFA and finishing the dealer regime.

Possible Nominees

In addition to filling the SEC chair vacancy, the President-elect will have to appoint two more regulators to fill other open seats on the SEC board. Until he does, two Obama administration appointees — Kara Stein (term up in 2017) and Michael Piwowar (term up in 2018) — will be the only commissioners on the board.  Piwowar, the Republican, is expected to become interim chair, but gridlock may ensue as Stein will essentially have veto power over any proposed rule or enforcement.

Among the candidates being mentioned for the SEC’s top post are:

  • Paul Atkins | Republican SEC Commissioner, 2002-2008; Transition team member in charge of financial regulation
  •  Anthony Scarmucci| Hedge fund manger & Trump campaign surrogate
  •  Dan Gallagher| Republican SEC Commissioner, 2011-2015
  •  Hester Pierce| The Republican commissioner appointed, but not approved, by President Obama in 2015. Senior research fellow at Mercatus Center


Policy Implications

  •  Fiduciary Rule

Rep. Ann Wagner (R-MO) says that Republicans are working to make repeal of Obama’s Retirement Savings rule a top Trump agenda item.  Trump has yet to take a position on the rule, which stands as a possible first case that forces the president-elect to choose between Old Guard Republicans and his more populist rhetoric.  White has also cautioned that the rule may not be able to go forward until there is a full Commission.

The Fiduciary Rule regulates how financial service products are sold and decreases incentives for giving out contradictory retirement savings advice.   The Obama administration says this rule will save Americans $17 billion per year.  The GOP  says the rule is too costly and deprives Americans of their right to control their own retirement planning.  Even if Republicans are not able to repeal the legislation, because of a Democratic filibuster in the Senate, the newly appointed Labor chief could delay implementation of the rule beyond April by claiming the industry needs more time to respond to the rule — a tactic used by the Obama administration to thwart Bush era rules they did not prefer. Trump could also direct the Labor chief to minimally enforce the rule, removing it as a real threat to the financial industry.

  •  Volcker Rule

The Volcker Rule, a Dodd Frank provision, would limit the speculative investments Wall Street can make with their own capital which does not benefit their customers.  Commercial banks view this as a ban on proprietary trading, and so far, have been successful in delaying the implementation of the law for six years. July 21, 2017 stands as the current date banks will need to comply, but the Trump administration may seek to delay this rule that gets at the root causes of the financial crisis.

  •  Risk Retention

The final risk retention rule was approved on December 24, 2015 and compliance with asset backed securities (ABS) collateralized with residential mortgages is already required. Next month, compliance with all other classes of ABS is required. The rule requires the securitizer of an ABS to retain at least 5 percent of the assets collateralized by the ABS and restricts the transfer, hedging, or pledge of that credit risk.

The rule prevents financial institutions from extending credit they know to be bad and then selling to another party, a pre-crisis trend easily explained by The Big Short. Whether or not Trump goes with the pro-business and deregulation fascinated Republican base, or sticks with his populist supporters on this issue remains to be seen.

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