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News June 19, 2017 Issue

Clayton Selection of Co-Directors Shows Enforcement Division in Transition

Does SEC chairman Jay Clayton’s decision this month to appoint two co-directors mean that the Division will continue to take a tough line on enforcement, or does it mean something else? The answer depends on what those co-directors bring to table, and on whom you ask – but there is little doubt that it shows an agency in transition.

Clayton reached both within the agency and back to his former law firm to fill the Division of Enforcement directorship, most recently held by just one person, Andrew Ceresney, who stepped down at the end of 2016. His within-the-agency choice was to name Stephanie Avakian, who became the Division’s acting director after Ceresney left, as one of its co-directors. She brings institutional knowledge since, in addition to serving as acting director, she served as the Division’s deputy director since June 2014.

Clayton’s other choice as co-director was Steven Peikin, who he worked with at Sullivan & Cromwell, a prestigious Wall Street law firm. Peikin also has experience as a prosecutor, having served as assistant U.S. attorney for the Southern District of New York from 1996 to 2004.

So which way will the Division of Enforcement under Clayton and his two new co-directors go? Under Clayton’s predecessor, Mary Jo White, the SEC quickly earned a reputation as a tough enforcer of securities laws, employing her "broken windows" philosophy of crime prevention to go after even minor infractions. Enforcement increased almost every year during White’s tenure. For instance, the dollar amount of disgorgement and penalties ordered and the amounts collected by the agency went from $2.8 billion in fiscal year 2011 to $4.1 billion in fiscal year 2015, according to the SEC’s Fiscal Year 2016 Annual Performance Report, released in May.

Will tough enforcement continue?

"While Clayton will make some changes in due course, I would be surprised to see an immediate major shift in SEC enforcement priorities," said Ropes & Gray counsel David Tittsworth. "It must be remembered that there are literally hundreds of enforcement cases in the pipeline. Given his stated commitment to robust enforcement, it seems doubtful that Clayton will act quickly to make dramatic modifications."

"Since his Senate confirmation hearing earlier this year, Clayton has made a point of emphasizing his commitment to a strong SEC enforcement program," he said. Tittsworth noted that in Clayton’s prepared statements to the Senate Banking Committee in March, he said that there is ‘zero room for bad actors in our capital markets’ and that he is ‘100 percent committed to rooting out any fraud and shady practices in our financial system.’"

On the other hand, there has been some speculation that Clayton and his Division of Enforcement team will go a little easier on enforcement, choosing to go after the more significant violations from larger firms, but leaving smaller firms and smaller violations alone. This is because, first, Clayton is a Trump administration appointee who has stressed the "capital formation" part of the agency’s mission; and second, because of a concern that both Clayton and Peikin, because of their time at Sullivan & Cromwell, may be more comfortable with how Wall Street operates.

"It was a shrewd move on the part of the SEC chairman to balance the existing enforcement regime with a new appointee who may be familiar with the chairman’s philosophy," said Faegre Baker Daniels partner David Porteous. "It also suggests that the commission thought, ‘To the extent that we have someone familiar with the existing investigations and proceedings and has significant institutional knowledge, as Ms. Avakian does, then it makes sense to have someone on board to see them through."

In fact, the situation seems to parallel to some degree 2013, when White appointed Ceresney, her former colleague from Debevoise, as co-director along with George Canellos, who had been up to that point the Division’s acting director. Within the year, Canellos left that position to join a private firm, and Ceresney became the Division director.

"Clayton following the same course here makes sense," said Paul Hastings of counsel Sam Puathasnanon. "Although Peikin has had a distinguished career in public service and in private practice, he may not be as familiar with the manner in which the Division of Enforcement operates on a day-to-day basis. Having Avakian as a co-director, after already serving as acting director for the past six months since Ceresney departed the SEC, ensures continuity and helps Peikin transition into the new role. Having that continuity will also likely give some comfort to the Enforcement staff that major changes are not immediately expected as a result of the leadership change. I expect that Avakian will likely return to private practice within 12 months."

"I expect that Clayton has high confidence in his former colleague Peikin, and their prior working relationship will facilitate a smooth transition for Clayton as he implements his focus and objectives for the enforcement program and agency," said Rogers & Hardin partner Stephen Councill.