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Will Wall Street’s top watchdog agency be defanged by President Trump, who has vowed to roll back restrictions on businesses?
After a period during which there were a record-high number of enforcement actions and a slew of tougher regulations under the Obama administration, the Securities and Exchange Commission is about to get a new boss. Walter “Jay” Clayton, a well-known New York attorney, was nominated by President-elect Donald Trump last week to head the agency. If confirmed, Clayton will be charged with overseeing some of the same powerful companies he has worked for.
Regulation often eases under SEC chairs who come from the industry, said Ian Roffman, a former senior trial counsel in the SEC’s Boston office who now defends companies and individuals before regulators.
“Predicting what an enforcement division is going to look like next year is much more challenging than predicting if there will be a rollback in regulation,’’ he said.
Appointing someone to run the SEC with ties to the industry isn’t uncommon.
Outgoing SEC chairwoman Mary Jo White had been a Wall Street lawyer after serving as a federal prosecutor in Manhattan. Her defense of large banking clients (and her husband’s corporate clients) required her to recuse herself from about 50 SEC cases in her tenure.
In fact, the six SEC chiefs who have held the job since George W. Bush took office in 2001, and through the Obama administration, have included an investment banking chief executive, leaders of stock exchanges, and a former head of the brokerage industry’s self-regulator. Before them, Arthur Levitt served as SEC chairman under President Bill Clinton, with the longest tenure of all — 1993 to 2001. Prior to his appointment, Levitt worked on Wall Street, and later as chairman of the American Stock Exchange.
“My nomination was criticized at the time because of my proximity to the Street,’’ Levitt said in an interview. But he went on to be an advocate for investors.
Levitt said he doesn’t know Clayton, but a new chairman appointed by Trump will probably review rules and regulations, he said. As for rolling back enforcement, “I doubt that very much,’’ he said.
But others, including Democratic lawmakers, are skeptical. They say Clayton’s work for Goldman Sachs Group Inc. and as an adviser to firms during the financial crisis — including Barclays’s purchase of assets from bankrupt Lehman Brothers — make him too cozy with an industry whose risk-taking led to the global meltdown.
The SEC reported 868 enforcement actions in the year that ended Sept. 30, calling for more than $4 billion in fines and penalties for investment advisers, brokers, and others who broke securities laws. That was a dramatic increase from fiscal year 2008, when there were 671 actions with financial penalties of $1 billion.
Trump and congressional Republicans have pledged to roll back many of the Dodd-Frank regulations — a series of rules signed into law in 2010 by Obama that were designed to prevent reckless behavior by investment firms. Lawyers in the field speculate that Clayton, like Republican appointees before him, will have a bias toward easing regulations.
When it comes to catching bad guys, former SEC officials said, the tone is typically set by the person in charge of enforcement. But many cases are in the pipeline for long periods, and the agency’s staff of more than 4,800 tends to drive how aggressively cases are pursued.
“Neither Republicans nor Democrats are particularly sympathetic to fraudsters in the financial markets,’’ said former SEC chief economist Chester Spatt, now a finance professor at Carnegie Mellon University.
But regulators a decade ago entirely missed the high-risk activities related to mortgage securities and complex derivatives. During that same period, Bernard Madoff was able to swindle investors out of billions of dollars, despite red flags and warnings from whistleblower Harry Markopolos.
Since then, the SEC has been working to clean up its act. Obama’s initial appointment to run the agency, Mary L. Schapiro, was the first woman to head it. She came to the government post after running the Financial Industry Regulatory Authority, the brokerage industry’s self-regulatory body.
While Schapiro dealt mainly with the aftermath of the financial crisis, White, who was named to the post in April 2013, came with a goal of adding more clout to the SEC’s enforcement actions. The former prosecutor, who pursued terrorist bombers and mobsters, instructed staff to pursue small cases as well as big ones in the belief it would deliver a stern message to anyone thinking of breaking the rules.
The agency in fiscal year 2016 brought 160 actions against investment advisers and investment companies — the most ever. It also took 21 Foreign Corrupt Practices Act-related enforcement actions against companies that allegedly were paying off officials to get overseas business; paid out a record $57 million to whistleblowers; and brought greater scrutiny to private equity firms.
But some of White’s other stated priorities, such as forcing companies to admit guilt in settlements, proved harder to deliver on. And critics from US Senator Elizabeth Warren to former Democratic presidential candidate Bernie Sanders have slammed the SEC for failing to hold Wall Street executives responsible for the lasting damage inflicted by the crisis.
Warren, a Massachusetts Democrat, also attacked White for not requiring more disclosure of political donations by corporations. Still, Boston University finance professor Mark Williams called White “an independent regulator focused on reducing the excessive risk-taking that helped cause the greatest financial crisis since the Great Depression.”
The question is where the chairman will direct his attention at an agency with a budget of nearly $1.8 billion and thousands of companies to oversee.
After years of “over-prosecuting” small crimes, said Roffman, the former SEC senior trial counsel, now a partner at the Boston-based law firm Nutter McClennen & Fish, “the quality of enforcement actions has gone way up” at the SEC. Even under a new chair appointed by Trump, he predicted, “I think there will a continuing trend of bigger and more substantial enforcement actions.”
Clayton did not respond to a request for an interview.
“There are some people who were hard chargers for the industry,” Roffman said, “then they come to government and they’re hard chargers for the government.”Beth Healy can be reached at email@example.com. Follow her on Twitter @HealyBeth.
Correction: An earlier version of this story misspelled the name of a Boston law firm. It is Nutter McClennen & Fish.