From the March 2017 issue of Investment Advisor • Subscribe!

‘Business as Usual’ at SEC Despite Staff Vacancies

Incoming SEC Chair Jay Clayton has a number of positions to fill, but commission remains active

Securities and Exchange Commission headquarters (Photo: New York Law Journal) Securities and Exchange Commission headquarters (Photo: New York Law Journal)

If confirmed, incoming Securities and Exchange Commission Chair Jay Clayton will be busy filling open vacancies on his staff — particularly top posts like division heads and a chief of staff.

But advisors and broker-dealers shouldn't count on SEC staff twiddling their thumbs in the meantime.

“In the short term, folks need to remember that, especially from an investigative and exam staff [standpoint], it will be a lot of business as usual,” Stephen Cohen, former associate director in the SEC's Division of Enforcement, told me in a mid-February interview.

Cohen, who recently joined Sidley Austin LLP as a partner in the Securities & Derivatives Enforcement and Regulatory practice, noted that the agency has “hundreds of career staff that don't take day-to-day direction from political appointees.” Indeed, Office of Compliance Inspections and Examination staff has already published its schedule for 2017. “They’re going to execute on that schedule,” he said.

OCIE director Marc Wyatt said that he’d leave the agency in February. Pete Driscoll, chief risk and strategy officer for OCIE, will become acting director. Driscoll served as OCIE's managing executive from 2013 through early 2016.

OCIE wasted little time after detailing its exam priorities in January to release a risk alert in February flagging the top five compliance failures the agency has detected in advisor exams.

OCIE said the list of compliance failures were sent to SEC-registered advisors via deficiency letters.

Staffers Looking for Violations and ‘Frauds’

While the new presidential administration gets settled, and Clayton starts filling his open-positions roster, Cohen said “the enforcement division, along with the asset management unit, does have professional staff that are looking for violations and looking for frauds, and they are going to open investigations and investigate them.”

Besides two new open commissioner spots — which are appointed by the president — Wyatt is one of a host of executive posts that Clayton will have to fill.

Andrew Ceresney, the SEC's head of enforcement, departed at year-end, leaving Deputy Director Stephanie Avakian as acting enforcement head.

Keith Higgins, director of the Division of Corporation Finance, left the agency in early January; Shelley Parratt, deputy director, is now acting director.

The agency's general counsel, Ann Small, has also departed the SEC; the acting general counsel is Sanket Bulsara, deputy general counsel for Appellate Litigation, Adjudication, and Enforcement.

Also slated to leave in February was Chief Operating Officer Jeffery Heslop, while former SEC Chairwoman Mary Jo White's chief of staff, Buddy Donohue, departed at the end of January.

Cohen expects Sullivan & Cromwell partner Clayton to bring in “a whole new set of folks in his office and to head up a lot of the divisions who are like-minded and who he feels comfortable with, relies on and trusts.”

But that isn't so easy. “It is challenging to get people to take these spots, because the SEC has an enormous amount of restrictions on stock holdings,” Cohen said. “For example, you can't own stocks in regulated entities like banks and broker-dealers. You have to make enormous public disclosures about your holdings. So it's tricky — and also it doesn't pay very much.”

However, according to Cohen, the SEC “is such a tremendous professional organization, there are always people that are interested in taking these positions.” Once they do so, he said, employees are “blown away by the talented staff.”

Acting Chair Takes Action

After becoming acting SEC chairman in January, Commissioner Michael Piwowar got busy by issuing in February comments on the agency's pay ratio disclosure rule, which requires a public company to disclose the ratio of the median of the annual total compensation of all employees to the annual total compensation of the CEO.

Piwowar noted that “some issuers have begun to encounter unanticipated compliance difficulties that may hinder them in meeting the reporting deadline.” In order to “better understand the nature of these difficulties,” he's seeking public input for 45 days on “any unexpected challenges that issuers have experienced as they prepare for compliance with the rule and whether relief is needed.”

As to potential changes in SEC enforcement under a new administration — and a new chair — a Feb. 6 memo circulating on Capitol Hill of changes to House Financial Services Committee Chairman Rep. Jeb Hensarling's Financial Choice Act includes provisions to tinker with the SEC's enforcement division, particularly the whistleblower award program created under the Dodd-Frank Act.

The Financial Choice Act is Hensarling's blueprint that will revise (or seek to replace portions of) the Dodd-Frank Wall Street Reform and Consumer Protection Act, which President Donald Trump has said his administration plans to perform “a big number on.” The act was expected to be reintroduced soon after press time in mid-February.

The draft memo also states that the SEC shall establish a “Wells Committee 2.0” to re-evaluate its enforcement program. Cohen notes that the SEC's whistleblower program, “generally speaking, has bipartisan support,” with Sen. Chuck Grassley, R-Iowa, chair of the Senate Judiciary Committee, “one of the biggest proponents.”

Cohen added that he’d be “very surprised” to see “dramatic changes” to the whistleblower office, but expects “attempts to tweak it.”

--- Read What Will New Financial Choice Act Look Like? on ThinkAdvisor.

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