By Amanda Maine, J.D.
Former SEC Chair Harvey Pitt and former Commissioner Daniel Gallagher engaged in a spirited conversation over recent securities enforcement efforts. The conversation took place in front of the Securities Docket’s annual Securities Enforcement Forum in Washington, D.C.
Pitt, who served as SEC chair from 2001 to 2003, said that the SEC has been in a regulatory “holding pattern,” given that there are only three present commissioners as President Obama’s two nominees for the commission’s empty seats still await confirmation. But in the area of enforcement, the staff has been active and aggressive, he said. While SEC activity has moved in a positive direction, with the upcoming election, everyone is awaiting what comes next. Pitt also jokingly referred to “de facto chair Elizabeth Warren,” the Democratic senator from Massachusetts who has been critical of SEC chair Mary Jo White’s tenure and has called for her demotion.
Gallagher, who touted his position of being on the losing side of the most 3-2 votes during his time at the SEC from 2011 to 2015, said that the SEC is less respected today, citing the Madoff Ponzi scheme and the SEC’s failure to detect it as an example. He also renewed his longtime criticism of the Dodd-Frank Act, which he said was written from the perspective of those who want to micromanage the SEC.
Gallagher also took aim at criticism from politicians regarding news reports of misconduct at financial institutions, citing in particular the recent revelation that employees had set up unauthorized accounts that customers had not requested in order to meet sales quotas. Wells Fargo executives have come under fire regarding the incident from a number of different lawmakers, including Sen. Warren, as well as Sens. Jeff Merkley (D-Ore), Bob Menendez (D-NJ), Sherrod Brown (D-Ohio), and Jack Reed (D-RI), who have been especially critical about the executives’ incentive compensation. According to Pitt, there should be concern not just about the number of customers hurt, but also about the company’s culture. What should also be examined is how to fix the environment that created the issues, he said.
Gallagher did not reserve his scorn for politicians, but also singled out the Department of Justice. He noted that the clamor in Washington post -Dodd-Frank was why there aren’t more people in jail. This has resulted in “insanity” from the DOJ, particularly in the large criminal fines imposed in cases involving residential mortgage-backed securities. Gallagher fears the SEC may get “sucked into the vortex created by the Department of Justice” and doesn’t know if the “genie can be put back in the bottle” at this point.
Pitt agreed that there is a degree of “media bloodlust” around certain cases involving large financial entities. Regarding the Justice Department penalties, he advised that the SEC does explain how they determine penalties, while the DOJ does not disclose the basis for their numbers.
Pitt took aim at the adoption of the Volcker rule, which he said was “designed to restrain banks.” When banks tried to develop alternative mechanisms to raise capital, the regulatory response was “that’s shadow banking, and that’s evil, too,” in his view. Wall Street, he said, used to be a place where risks were taken, and while systemic risk is something to be concerned about, the new rules have nothing to do with the 2007-2008 meltdown, Pitt advised. The Volcker Rule was flawed from the get-go, rushed to be implemented, and has prevented small- and mid-cap companies from getting capital, Pitt said.
In response to a question about the SEC’s regulatory functions and its enforcement functions, Pitt proclaimed that the SEC used to be a regulatory agency with enforcement power, and today it is an enforcement agency with regulatory power. People are now afraid of a possible enforcement action if they come to the SEC with questions, according to Pitt. The agency needs “smarter” regulation, he said, and it should review every one of its rules.
Gallagher agreed with Pitt’s review suggestion, observing that the securities laws and regulations have been developed over 70 years, plus the rules required under Dodd-Frank. There has not been a comprehensive review of these rules, despite the addition of so many rules being added to the SEC’s powers. Pitt, sardonically observing that “no crisis should be wasted,” singled out the conflict mineral rules and the pay ratio rules under Dodd-Frank, and criticized Congress for passing the legislation before a final report on the law was available.
An audience member raised the question about the size of penalties under Dodd-Frank and the SEC’s attempts to go after individuals, and whether individuals would want certain jobs, particularly that of chief compliance officer. Gallagher noted that during his time at the SEC, the staff began “ferreting out ‘gatekeepers,’” which he described as “anyone with a pulse.” CCOs, he said, have every right to be horrified at the possibility of SEC enforcement. As far as policy goes, it is wrong because you want to incentivize compliance, he said, not traumatize them with interviews and Wells notices, Gallagher warned.