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Two Insiders on SEC’s Possible Future Under Clayton

March 22, 2017, 7:17 PM

Sullivan & Cromwell’s Walter “Jay” Clayton is set on Thursday to testify in front of the Senate’s Banking Committee for a hearing on his nomination to chair the Securities and Exchange Commission.

Clayton’s ties to Wall Street — his law firm has represented numerous banks during the bailout era, and his wife works at Goldman Sachs — and his past critique of the SEC’s enforcement approach have generated controversy with left-leaning groups such as the Center for American Progress, Public Citizen and others.

Most notably, in 2011, Clayton was listed first among a dozen drafters and editors of an article that criticized the agency’s use of the Foreign Corrupt Practices Act — which the SEC and Department of Justice have used to collect billions of dollars in penalties from companies caught bribing foreign governments. The article argued the statute actually “exacerbates” rather than deters overseas corruption, and discourages companies from listing on U.S. stock exchanges.

“The current anti-bribery regime — which tends to place disproportionate burdens on U.S. regulated companies ... is causing lasting harm to the competitiveness of U.S. regulated companies and the U.S. capital markets,” the article stated.

Titled, “The FCPA and Its Impact On International Business -- Should Anything Be Done to Minimize the Consequences of the U.S.’s Unique Position on Combating Offshore Corruption?” the 26-page article was published by the New York City Bar Association’s Committee on International Transactions, which Clayton chaired at the time.

If confirmed, Clayton would lead the agency as it puts two major reputation-damaging events behind it: Its failure to act on several tips that Bernie Madoff was operating a Ponzi scheme, which blew up in 2006 and caused billions of dollars in investor losses; and its inability to regulate securities markets in a way that would have stemmed the financial crisis.

For some perspective on what’s been happening at the agency, Big Law Business spoke to two former directors of enforcement about how the SEC has transformed in recent years and its impact.

William McLucas, a WilmerHale partner, joined the SEC in 1978 and served as its director of enforcement for eight years, including most of the 1990s.

[caption id="attachment_45711" align="aligncenter” width="405"][Image “William R. McLucas of Wilmer Cutler Pickering Hall and Dorr testifies at a joint meeting between the Securities and Exchange Commission and the Commodity Futures Trading Commission on harmonizing financial regulation in Washington, D.C., U.S., on Thursday, September 3, 2009. Photographer: Brendan Hoffman/Bloomberg News” (src=https://bol.bna.com/wp-content/uploads/2017/03/m564173-e1490203187490.jpg)]William R. McLucas of Wilmer Cutler Pickering Hall and Dorr testifies at a joint meeting between the Securities and Exchange Commission and the Commodity Futures Trading Commission on harmonizing financial regulation in Washington, D.C., U.S., on Thursday, September 3, 2009. Photographer: Brendan Hoffman/Bloomberg News[/caption]

McLucas said he believes the Madoff Scandal had the most profound effect in terms of changing how the agency pursues its mission of regulating securities markets.

“It has moved far more into a prosecutorial role than it ever has before,” he said, of the SEC. “I think it had a capacity for being more balanced and measured in its enforcement approach.”

But after the Madoff scandal, McLucas said the agency has become more aggressive in its investigations out of fear of being called in front of a congressional committee because the agency failed to follow up on a tip about an investor fraud.

“When you’re a hammer at large, the world is a nail,” he said, adding that now, “There is a much more unforgiving, unyielding approach – no violation is too small to ignore and no individual who has jaywalked is beyond being held accountable for it.”

That approach has magnified the agency’s ability to bring enforcement cases, but it comes with a cost, McLucas said. In some cases, the agency may charge individuals or companies where the evidence is strong but culpability is arguable, he said. Not bringing cases is as difficult as bringing cases, he said.

“When I was a director there wasn’t a day I walked out of the building that I didn’t say to myself, ‘I hope somebody didn’t do something hellaciously stupid or something that’s going to get the agency in trouble,’” he said.

With the change in administration, McLucas said it was difficult to predict what exactly would happen at the agency and its approach to enforcement under Clayton.He noted it’s now common for division heads to leave and find jobs in the private sector, which previously wasn’t the case.

“You have an overabundance of people moving on and a whole bunch of people moving in and the question is do you lose something in the transition? And the answer is yes, but it’s always a matter of degree,” said McLucas.

Andrew Ceresney, the outgoing director of enforcement at the SEC had held the position since 2013 and in January announced he was re-joining Debevoise & Plimpton, where the outgoing chair of the SEC, Mary Jo White, is also headed.

[caption id="attachment_37061" align="aligncenter” width="367"][Image “Andrew Ceresney, director of enforcement for the U.S. Securities & Exchange Commission (SEC), speaks during an interview in New York, U.S., on Friday, July 17, 2015. Photographer: Michael Nagle/Bloomberg " (src=https://bol.bna.com/wp-content/uploads/2016/12/226100004-e1481228084732.jpg)]Andrew Ceresney, director of enforcement for the U.S. Securities & Exchange Commission (SEC), speaks during an interview in New York, U.S., on Friday, July 17, 2015. Photographer: Michael Nagle/Bloomberg[/caption]

Ceresney acknowledged that both he, and his immediate predecessor as director of enforcement, Robert Khuzami, previously worked as federal prosecutors in Manhattan. As a result, they “definitely imported” some prosecutorial tactics to the agency, including structuring settlements based on the targets’ cooperation, making sweeps as opposed to one-off cases and generally importing certain trial tactics, he said.

“I really feel like the SEC has established itself as a tough but fair aggressive regulator,” said Ceresney. “A lot of what we did at the SEC has resulted in a real enhancement of its reputation.”

He rejected the criticism that the agency was overaggressive. Instead, he noted that the Dodd-Frank Act had given the SEC increased authority to investigate hedge funds and asset managers.

“We have definitely imported some of the prosecutorial tools in the SEC,” said Ceresney, “but I think a lot of what you’re seeing is increased scope of enforcement.”

Thus, the agency has also targeted new areas for increased enforcement, such as the MUNI bonds’ market, which for years had been ignored, and new types of fraud, such as that from algorithmic trading.

As far as how Clayton may change the agency, Ceresney was skeptical that the agency would rollback its enforcement of the Foreign Corrupt Practices Act. He said Clayton had worked on the article in 2011, and since then many other countries have adopted and started enforcing parallel laws that prohibit foreign government officials. The article had taken issue with the fact that the U.S. took the lede on this, which had a disproportionate effect on its companies.

“I don’t think he would have the same position today,” said Ceresney.

Ceresney’s colleague, Mary Joe White, shared a similar sentiment with Big Law Business when she rejoined Debevoise.

“Both enforcement at the SEC and DOJ, I think, will remain quite strong,” said White .

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