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News March 6, 2017 Issue

New SEC Already Here as Piwowar and White House Make Changes

If you’re looking for changes at the SEC, you don’t need to wait for Jay Clayton to be approved by the Senate as the new SEC chair. The agency has already changed in a number of ways. Acting chairman Michael Piwowar recently limited who can initiate enforcement actions, most division directors have left, and the Trump administration plans to place regulatory monitors in federal agencies.

This is all before the Senate votes up or down on Clayton and before the appointment of two other commissioners by Trump.

While the final shape of the new SEC won’t be settled for some time, it is safe at this point, to state this: It’s not former chair Mary Jo White’s SEC anymore.

Consider the following developments since White departed the SEC:

  • Piwowar is moving in a different direction than White. As commissioner, he challenged a number of SEC practices, among them the increased use by the Division of Enforcement of administrative law judges to decide enforcement actions, the "broken windows" enforcement philosophy espoused by White, and the agency’s reliance on increased numbers of enforcement cases to show success. He also dissented on the agency’s proposed derivatives rule. Since taking office, he has frozen rulemaking required by the Dodd-Frank Act, and taken steps to begin reviewing some already-completed rules, according to the Wall Street Journal. "Piwowar is using tools readily at his disposal to jump start a reevaluation of the way the agency uses its enforcement authority and pursues its regulatory agenda," said Willkie Farr partner and former SEC deputy chief of staff James Burns.
  • Only the Division of Enforcement director may initiate enforcement actions. Piwowar, in one of his more consequential actions in the few weeks since being placed in charge of the agency, removed subpoena authority from about 20 senior enforcement officials, limiting it to the division director. In doing so, he reversed a 2009 decision by the Obama administration that, in the wake of the Bernard Madoff scandal, gave lower-ranking enforcement officials subpoena authority. Historically, the authority to initiate enforcement actions resided even higher up the chain: the full Commission had to approve them. "The practical impact of the change will be that the formal order process will slow down," said Bell Nunnally partner Robert Long. "Because the audience will be the Division director, the staff and local supervisors will likely take a little more time to evaluate a matter, make sure a formal order is warranted, and craft a succinct, well-written memo seeking formal authority. Also, having one person responsible for approving all the formal orders will likely result in some delays in the process as a result of scheduling and availability issues."
  • SEC won’t challenge collateral bar ban. The agency, in a February 23 statement, said it had determined "not to seek further review" of a U.S. Court of Appeals for the D.C. Circuit decision that vacated part of a previous Commission order. The portion in question imposed collateral bars against the defendant, even though the violations occurred before the 2010 passage of the Dodd-Frank Act, which authorized the SEC to seek such bars. It was not the first time the agency decided against such a ruling – it reached a similar conclusion in October 2015 when it chose not to appeal a federal appeals court ruling against its use of collateral bar bans – a position applauded at the time by Piwowar and then-commissioner Daniel Gallagher.
  • Most division directors are gone. Office of Compliance Inspections and Examinations director Marc Wyatt on January 30 announced his departure from the SEC, following in the footsteps of former Division of Enforcement director Andrew Ceresney, former Division of Corporate Finance director Keith Higgins, former chief of staff Andrew Donohue, and several regional office directors. Division of Investment Management director David Grim appears to be one of the few director-level holdovers. What these departures mean in terms of enforcement and rulemaking will have to await their replacements, but the loss of most senior staff members, even with their deputies temporarily assuming the positions, and the expectation of an almost totally new senior staff is, by definition, a new SEC.
  • Regulatory monitors may be on the way. President Trump on February 24 signed an executive order that will place regulatory officers inside federal agencies to find and root out overly burdensome regulations. He also signed an executive order on January 30 requiring that whenever a federal department or agency proposes a new rule, it must identify two others that can be eliminated. Whether either of these orders will affect the SEC, which is an independent agency, is an open question. Much will depend on whether Clayton, or Piwowar, chooses to accept such an intrusion into the agency. "If this occurs, the issue of first order will not be the regulations, but the independence of the SEC," said Stroock partner and former Division of Investment Management deputy director Robert Plaze.

Turning the ship

The changes made to date by Piwowar "highlight that whoever the chair is, even the acting chair, matters," said Shearman & Sterling partner Nathan Greene.

Beyond that, he said, what Piwowar’s actions demonstrate is that "setting boundaries around the staff, such as limiting the initiation of enforcement actions to the Division of Enforcement director, is really a way of influencing direction, of turning the ship." Any agency’s or department’s permanent staff have their own interests, not necessarily the same as the political appointees, he said, so procedural changes that cut the authority of lower-level staff can be an early effective way to create some change from the top down.

"These actions, together with the noise from Piwowar, can be looked at as part of a whole package and one can infer that a whole bunch of procedural hurdles may be set up that could slow the SEC’s enforcement lawyers," said Plaze. On the other hand, if each is looked at individually, they may not have the same import. For instance, he noted, the decision not to challenge a court on a retroactive collateral bar ban won’t mean much in several years because time will make such challenges obsolete.

In regard to regulations, "It does feel like the agency is taking a breath after the Dodd-Frank years – and the raft of systemic risk proposals in particular," said Burns. "It is an opportune time for the SEC to reorient itself to reevaluate certain of its rules affecting investment advisers – some of long standing, some more recent – to ask just how necessary and effective they are."

As for the future, Greene noted that Clayton, whose background is not in enforcement or regulation, "is not known in asset management circles," although it appears that his philosophy is pro-business, not unlike that of the President. Once the full Commission is on board, "it will find its own stride in office," he said.