April 11 (Bloomberg) -- Mary Jo White took over the Securities and Exchange Commission with a back-to-basics plan to toughen enforcement and clear a backlog of regulations aimed at the last financial crisis.
Now White and the SEC may be confronting the next crisis: claims that the stock market is rigged. Ending her first year as SEC chairman, White faces a surge of pressure to rein in high-frequency traders portrayed as the stock market’s scalpers in Michael Lewis’s new book, “Flash Boys.”
A former litigator renowned for her independent streak, White said the agency won’t be knocked off its course. The regulator is taking a long view, examining all features of the hyper-fast markets, including high-frequency traders, and using a “data-driven, disciplined approach.”
“Certainly if we arrived at that conclusion as to any aspect of that, we would take action and respond,” White said. “But you want to be right about it and smart about it.”
White took office one year ago this week touted by President Barack Obama as a hard-charging New York prosecutor who wouldn’t be rattled by Wall Street’s power and influence. She’s delivered that message while also building a record as a deal-maker willing to reach out to Republicans, and disappoint Democrats, to get things done.
“Even though you are a political appointee, either in my job or my fellow commissioners’ jobs, politics really doesn’t come with you,” White said.
Wall Street banks and brokers remain wary. They’ve taken note of White’s decision to seek more admissions of wrongdoing and her vow to push for settlements that “have teeth.” At the same time, she’s eased some worries by preaching the need to review regulatory burdens and weigh the cost of new rules.
“While there has been an effort to ramp up enforcement, they are also clearly trying to be even-handed and trying to do so in a judicious way,” said Tom Quaadman, vice president of the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness. Under White, he added, the agency is no longer “acting in the way that the political winds were blowing.”
“I certainly believe I ran the Southern District of New York quite independently,” White said. “I think you get better decision-making when you do that.”
White, 66, left a comfortable position at Debevoise & Plimpton LLP, a law firm where she earned $2.4 million in 2012, to return to government. A workaholic whose main diversion is her die-hard affection for the New York Yankees, White says her new schedule leaves little time for old habits such as running.
“I did the 5K part of the Cherry Blossom race” White said, referring to a popular running event in Washington. “Run is a misnomer when it comes to me. I’m right in front of the sweep truck.”
White’s review of high-frequency trading practices is taking place even as the agency juggles a backlog of more than 40 regulations required by the four-year-old Dodd-Frank Act.
A self-described “efficiency nut,” White reorganized the agency’s bureaucracy last year to accelerate progress on Dodd-Frank measures; she assigned workers to individual projects instead of asking them to juggle multiple regulations.
White has also courted closer relationships with the SEC’s four commissioners to get more done. She meets with each of them one-on-one at least once a week, according to her official calendar. Wall Street firms such as BlackRock Inc., the world’s largest asset manager, and Goldman Sachs Group Inc. got time with White just twice in 2013. Other firms, such as Morgan Stanley, got less.
White also has made efforts to improve relations with the agency’s 4,000 workers, most of them covered by a union that has clashed with her over perks she introduced for management. She’s handed out donuts in the SEC’s lobby and recorded voicemail messages thanking them for their work.
“She manages by walking around, more than Mary did and more than I did,” said Elisse B. Walter, who served as SEC chairman for five months after the tenure of Mary Schapiro and before White was confirmed by the Senate.
“She clearly has solicited lots of advice, and she’s doing it better than they did,” SEC Commissioner Daniel M. Gallagher said in an interview.
At times, White’s outreach to Republicans has pained Democrats. A rule proposed in December, for instance, further liberalized small stock offerings and cut state regulators out of the chain of oversight. The rule, required under a law known as the Jumpstart Our Business Startups Act, was a favorite of Republicans.
Democratic-aligned critics complain that she has prioritized the deregulatory JOBS Act agenda while failing to make enough progress on Dodd-Frank. Dennis Kelleher, president of financial-reform advocacy group Better Markets, said that the SEC hasn’t finished rules to limit the risk posed by derivatives trading and the conflicts of interest inherent in credit ratings.
“I think Wall Street’s allies on the Hill are pretty pleased,” Kelleher said in an interview.
Democrats such as Massachusetts Senator Elizabeth Warren applauded White’s decision to seek more admissions of wrongdoing in the agency’s enforcement cases. Critics -- notably U.S. District Judge Jed Rakoff in Manhattan -- complained that individuals and companies were allowed to pay fines to close cases without acknowledging wrongdoing.
White knew when she arrived at the SEC that she would probably change that policy, according to a person familiar with the matter who asked to not be named because the deliberations were private.
Two months later, she announced the SEC would seek admissions in cases where misconduct was particularly egregious or hurt large numbers of investors. The message was underscored weeks later when White and two other commissioners rejected a pending settlement with hedge-fund manager Philip Falcone.
Some see the outcome as mixed. The agency’s lawyers got what they wanted, an admission from Falcone that he improperly borrowed $113 million from a hedge fund to pay his personal taxes. All the same, the word “fraud” didn’t appear in the deal, probably shielding him from further litigation.
Seeking admissions can slow the process of resolving cases because defendants worry that admitting to violations will expose them to lawsuits from outside parties such as investors.
The SEC is trying to send a message about the strength of its settlements while avoiding terms that result in “crushing private liability” for a defendant, said Stephen J. Crimmins, a former SEC enforcement attorney and partner at K&L Gates LLP.
“We’ve seen carefully crafted settlements that have been put together in a way that will not impose unwarranted amounts of private liability automatically,” said Crimmins, whose clients include banks and hedge funds.
White’s decision to scuttle the political spending proposal irked many Democrats, even though she had signaled it in advance. In a speech one month before the SEC removed the item from its public rulemaking agenda, White admonished “those who seek to effectuate social policy or political change through the SEC’s powers of mandatory disclosure.”
“Anyone who read that speech shouldn’t have been surprised when we took out, a couple of weeks later, this political-contribution petition,” Gallagher said at a public forum on April 3.
White hasn’t sworn off pursuing such a rule entirely; she said only that she was reserving the agency’s official agenda for measures moving forward within the next year.
So far, White has sought to avoid siding exclusively with Democrats or Republicans. She’s made progress on some Democratic priorities, including a proposal to require public companies disclose how much more CEOs earn than the median worker. And she presided over a unanimous commission vote on a rule designed to make money-market mutual funds safer -- a rule that ran aground under Schapiro.
“Mary Jo White is much more strongly committed to building the consensus and bringing the SEC to resolution on decisions,” Senator Mike Crapo, the senior Republican on the Senate Banking Committee said in an interview. “And she is, I think, showing the flexibility that it takes to get there.”
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