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After Hey Hey, Ho, Ho, Mary Jo It's Time to Go

posted by Adam Levitin

Senator Warren has written a pretty stinging rebuke of the ineffectiveness of Mary Jo White as SEC Chair. The take-away from Senator Warren's letter is that it's time for MJW to go: the SEC needs new and effective leadership. The SEC was asleep at the switch during the lead-up to the financial crisis and its post-crisis performance has been less than impressive. In a target-rich environment, the SEC has not notched any major enforcement wins and its rulemaking has been milquetoast (and in many cases continues to be delinquent, five years after Dodd-Frank required the rules). The SEC has also been unwilling to seriously discipline large financial institutions, creating a double standard in which insider traders and boiler room operators are treated much harsher than recidivist institutions.  

I don't know if MJW will be out the door in a month or if she'll tough it out until the next administration. But I think it's useful to ask why things went so wrong with MJW and how not to repeat the mistake of her appointment.  

My view is that MJW had entirely the wrong background to be running the SEC. MJW's background was as a litigator:  a US Attorney and defense counsel at Debevoise Plimpton. She's got impressive litigation chops.  The SEC Chair, however, is not a litigation position. It's a policy and administrative position. The SEC Chair doesn't run litigation and cannot single-handedly direct litigation. The SEC in general does a lot more than litigation, including rulemaking and oversight. It's ambit extends far beyond the stupid, but headline grabbing insider trading cases and reaches into much more important things like regulation of rating agencies and safety-and-soundness issues with clearinghouses and broker-dealers.  So why would a litigation resume be what we want in an SEC Chair?  Many of the most important issues before the SEC never end up in litigation. In fact, the stuff that gets litigated is often the more minor stuff, like prosecution of penny stock frauds. 

I'm not sure what the ideal resume for an SEC Chair is, but I think it has to be someone who has some policy chops, not another former prosecutor or securities litigator. Unfortunately, a President who wants to indicate that s/he'll be tough on Wall Street often thinks the best way to signal this is to appoint a former prosecutor.  Hopefully we won't fall for that trick again. If we want better securities regulation, a prosecutor is probably the wrong choice to head the SEC. 

Comments

Interesting comments on the qualifications for an agency heard. I think the trend is more specifically toward prosecutors in particular than litigation. We have seen this in the choice of some of the monitors for settlements; people with little or no substantive background but excellent prosecutorial records. Monitorships are not about punishment and wrongdoing, but about rehabilitation and correction, so that seems like the wrong background. Compliance requires deep and broad substantive knowledge, and the same could be said about rulemaking. Litigation doesn't provide that. I think the appeal of prosecutors and litigators is that we sometimes assume that they'll be "tough" or "rigorous". I think a review of the evidence suggests the opposite in the financial services space (e.g. Lawsky)

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