By James A. Kidney: June 18, 2015
President Obama has two vacancies to fill on the five-member Securities and Exchange Commission. One will be a Democrat and the other must be a Republican or independent. Rather than use these appointments as an opportunity to bring on both real-world experience from finance and open the commissioner ranks beyond Washington and New York, early word is that the likely nominees are from the same old well: Wall Street lawyers and congressional staffers. These selections possibly have the virtue of relatively easy confirmation through a recalcitrant Senate, but they are a lost opportunity.
Daniel Gallagher, one of two Republican commissioners, is resigning after serving since November 7, 2011. Long-time Democratic Commissioner Luis Aguilar is leaving after serving since July 31, 2008. Their replacements will serve well into the next administration. They will face continuing issues in the long, drawn-out implementation and enforcement of remaining Dodd-Frank rules and could help to push a reluctant Commission to address important issues subject to their jurisdiction, including a proposal – dead for now – to require public companies to disclose their political contributions. The latter issue could well become a focus of renewed attention after the coming election. There also are continuing questions about the impact of stock buybacks, program trading and other recent market practices. Are they safe? Do they require any or more regulation? The SEC, which is largely reactive and late, has done little to nothing to study these issues.
The SEC also has work to do to restore its reputation as an effective agency which is not captive to those it is supposed to regulate. Along with the Department of Justice, there is reasonable skepticism that the agency was sufficiently tough on individuals who approved suspect practices on Wall Street that contributed to the 2008 financial crash. Appointing more lawyers with a history of defending financial wrongdoers and their employers will not relieve this concern.
At least three names, and perhaps others, have surfaced as potential nominees for the Gallagher and Aguilar vacancies. Two are Washington lawyers specializing in counseling or defending corporations. The third is on the congressional banking staff. Presumably they are well qualified (on paper, at least) and have good intentions. We will not name them here because my point is not to be critical of them, but to suggest that the President’s net should be wider.
One thing the SEC does not need is another white collar defense attorney, or even one who relies for his or her livelihood in counseling large public companies on corporate governance matters. Its current chairman, Mary Jo White, spent nearly two decades representing white collar defendants on Wall Street. The departing Mr. Gallagher, though not an enforcement lawyer during his tenure as a staff attorney at the Commission, represented civil defendants in SEC enforcement proceedings at Wilmer Hale, which is practically a Washington feeder firm for lawyers wishing to punch a ticket at a high position at the SEC before returning to private practice.
Indeed, current commissioner, Kara Stein, a Democrat, was an associate at Wilmer Cutler before moving on to a variety of positions as staff to the Senate Banking Committee. Commissioner Stein has been the most outspoken of the current commissioners in suggesting that the SEC should be more aggressive in policing the markets and creating stronger rules under Dodd Frank. She apparently left Wilmer as a young associate without drinking too much of the punch, but her experience is entirely within the short walk from Wilmers’s Pennsylvania Avenue offices to the Capitol.
Obama’s other appointment, Michael S. Piwowar, was the Republican chief economist for the Senate Banking Committee under conservatives Mike Crapo (R-Idaho) and Richard Shelby (R-Alabama). He briefly was a visiting scholar with the SEC Office of Economic Analysis and served a one-year fixed term at the President’s Council of Economic Advisers under Presidents Bush and Obama.
(That both Piwowar and Stein come from Senate staff ranks is a reflection of the difficulties the President has in finding appointments that will pass the Senate confirmation roadblock.)
The other outgoing commissioner, Aguilar, from Atlanta, was appointed by President George W. Bush to fill a Democrat seat. He was reappointed to another term by President Obama. He has been modestly outspoken in favor of stronger enforcement against Wall Street. He, too, was a partner in corporate practice, McKenna Long & Aldridge, LLP, but focused primarily on corporate governance and transactional issues more than white collar defense work. Earlier in his career, Commissioner Aguilar was responsible for all legal and compliance matters at Invesco International, whose clients are principally institutional investors such as pension plans.
With that description of the current crew of commissioners, it is fair to ask: What is missing here? One could identify many characteristics, but let’s stick with two.
First, with Mr. Aguilar’s departure, all current commissioners hale from either New York or Washington. All of the “mentioned” replacements would simply harden that mix. The Northeast has dominated commission appointments for years – perhaps forever. Of 19 commissioners and Commission chairmen appointed by Presidents Bush and Obama since 2000, only four were outside New York, Washington and, one, Philadelphia. For those counting, the four are Isaac Hunt, Akron; Roel Campos, Houston; Troy Parades, St. Louis, and Aguilar, Atlanta. (Chairman Christopher Cox, a Bush appointee, was a congressman from California but spent 17 years in Congress before his appointment. The calculation counts him as a Washingtonian.)
There has been only one appointee west of St. Louis in the last 15 years, and he, Campos, was essentially a broadcast executive. Why are Chicago, Dallas, San Francisco, Charlotte, Orlando, Denver or other places with big businesses and small businesses — public companies, broker-dealers and banks – never sources for new commissioners? The concern here is not for a sterile geographical balance. Rather, it is that the SEC is consistently dominated by those who are fully embedded in the New York-Washington axis. If not actively sympathetic to the needs of those the SEC is principally charged with regulating, they are cozy with these institutions. In my 25 years with the SEC, I have no doubt that in nearly all instances these connections not only are unbroken during tenure on the Commission, but almost always lead to a very sympathetic hearing denied to the average Joe or Joanne and to lesser institutions.
Appointments outside this axis would not guarantee a more skeptical, independent commissioner, but surely there might be a better chance for one. The downside of greater geographic differentiation is nil. As is often said in Washington, it’s the appearance that counts – which usually means it looks bad but we can’t prove it. A wider net here would help the image, at least.
Second, no one on the Commission now, or at any time since William Donaldson in 2005, was a senior operating executive with a major brokerage institution, investment house, bank or public company. No one has had substantial direct employment with the businesses regulated by the SEC except as legal counsel to public companies, Invesco or to Congress.
In fact, such commissioners are, to use a tired phrase, “rare as hen’s teeth” in the history of the SEC. Aside from Donaldson, there have been only two others. They are John Shad, who was chairman from 1981-87 under President Ronald Reagan and Arthur Levitt, who was chairman during President Bill Clinton’s entire term in office.
Leadership combined with a thorough background in the day-to-day operations of brokerage, banking, investment firms, and related institutions is woefully lacking among commissioners. Lawyers who spend their lives practicing law are not well-suited, by-and-large, as leaders. Snide comments about our President aside, this is particularly true of securities lawyers, whose elites lead hard-working but cosseted lives among the most privileged in America. I have been a vocal critic of the revolving door at the higher echelons of the SEC staff. But that is because what the staff does is largely hidden from public view. Weak and favored enforcement decisions are hidden under the rubric of “prosecutorial discretion.” Where long experience on the operation and business side of markets and financial institutions is needed is at the highly visible public leadership level of a commissioner or, even better, chairman. Such persons, perhaps like Shad and Donaldson, who capped careers with an important job in public service, know where the bodies are buried and are unlikely to be cowed by former competitors and colleagues. Importantly, they don’t need to worry about their next job. If they are men and women of integrity, they will take pride in having careers built on solid foundations and expect the same of others.
Levitt as SEC chairman opposed proposals to regulate derivatives and supported repeal of the Glass-Steagall Act in the 1990s, both of which actions certainly aggravated and contributed to the cause of the 2008 crash. This merely shows that on-the-ground industry experience is no guarantee of strong performance. But Levitt also served under a president who favored these moves and was sympathetic to Wall Street. In any event, the SEC has suffered under many lawyer commissioners exercising poor regulatory judgment, but lawyers keep being nominated. As with any nomination, integrity and a willingness to work for the people as a whole are essential, regardless of background.
One thing we as a nation do not need is yet another white collar defense lawyer on the Commission. This skillset is overrepresented. The Division of Enforcement has plenty of talented lawyers, albeit sometimes cowed by their managers looking for their next job in a Wall Street law firm. They are fully able to advise any commissioner of the legal angles. Plus, each commissioner has his or her own staff of advisors, including lawyers. Former congressional staffers might be helpful, but their rightful position is as staff to a commissioner – not being a commissioner themselves.
The SEC’s charge is national. Its constituency is supposed to keep the markets honest for the small investor, which entails actual experience in those markets. Shouldn’t the Commission reflect those characteristics? Not because doing so is politically correct, but because experience has shown that the usual well has not been nourishing for the country.
The appointment of commissioners to the SEC, especially those under the chairman, has been a political after-thought. Nominees have lacked relevant business experience and come from a narrow, inbred community since long before the current administration. Sadly, this administration has not upped the qualifications and has instead taken easy routes to confirmation. The SEC is – or at least could be – important. Appointments to the leadership should be treated as such.
Mr. Kidney was a trial attorney at the Washington office of the SEC for 25 years before retiring in 2014.