Ex-Enforcement Chief Suggests Priorities of a Jay Clayton SEC

Objections to what’s been seen over the past few years as “too much regulation by enforcement” — the idea that members of public companies or regulated entities only discover that certain types of conduct could be subject to an enforcement action as they’re being examined — will also likely be reined in, Khuzami suggested, via agency guidance detailing “where the lines are between proper and improper conduct.”

SEC Acting Chairman Michael Piwowar announced recently that the “delegated authority” granted to senior officials at the agency to open formal investigations and issue subpoenas has been pulled back and now resides in the hands of the enforcement director only.

“This means it will take more time to open cases and more questions being asked,” Khuzami said. “I think there are legitimate questions about whether or not that serves a proper purpose. Certainly the commission has the right to understand what cases are opened, but I think there’s a significant view out there that there are ways to do that without slowing down the process of how these formal orders are issued. Certainly, [the rollback] could be viewed as demoralizing to the staff who want to move pretty quickly on some of these cases.”

The Financial Choice Act

House Financial Services Committee Chairman Rep. Jeb Hensarling’s Financial Choice Act, which he said in mid-March would be reintroduced in a matter of weeks, would affect another signature achievement of White’s SEC: its whistleblower rules.

The goal of Hensarling’s legislation? As he proudly told members of the Hispanic Chamber during remarks in mid-March, it is to throw the Dodd-Frank Act onto “the ash heap of history.”

As Khuzami points out, the Choice Act — as detailed in a Feb. 6 memo about the act’s new mandates — calls for whistleblowers “to report in-house first before going to the SEC, in order to give companies the opportunity to investigate the matter and take corrective action.”

The Choice Act memo also floats the idea of prohibiting co-conspirators from getting a whistleblower award. Khuzami said that this “could be significant because obviously it’s often individuals who are involved in the wrongdoing who know most about it and make the best whistleblowers, despite their own involvement.” Should those individuals become ineligible for an award, “that could have an impact on the number of people who choose to blow the whistle.”

Hensarling’s Choice Act also seeks to crack down on “stacking of penalties,” where multiple regulators bring actions against the same institutions for the same conduct. The Act would require federal regulators “to take into account penalties imposed by others in deciding what’s appropriate in their particular cases,” Khuzami said.

Piwowar and others have also discussed giving corporate penalties a “closer look,” Khuzami continued, regarding “objections raised to corporate penalties in some circumstances where shareholders [didn't benefit] from the misconduct, in the sense that the company they owned shares in may have purchased an asset, for instance, whose stock’s value was inflated due to misconduct that hadn’t yet been revealed.”

There’s also the issue of “whether or not shareholders would be penalized if a penalty were imposed. So there’s a view that you shouldn’t impose a corporate penalty if shareholders didn’t get a benefit and would suffer as a result of the penalty.”

Still others opine, Khuzami continued, that penalizing companies in general “may not serve much of a purpose because of the view that shareholders will, as a result, call for changes in controls, or changes in senior management” where penalties haven’t been backed by “empirical data. So … you could see a rollback of such penalties.”

— Read Reintroduction of Financial Choice Act Coming in ‘Weeks’: Hensarling on ThinkAdvisor.