Senator Elizabeth Warren
SEC Chair Mary Jo White

Perhaps SEC officials hoped they were bolstering their agency’s image as a tough regulator when they reported on October 11, 2016 that the SEC had filed a record number of enforcement actions in fiscal year 2016. That was certainly the way the officials quoted in the agency’s press release played it. But if that was their plan, Senator Elizabeth Warren, at least, was having none of it. Just days after the agency released its enforcement statistics, Senator Warren sent a 12-page letter to President Barack Obama calling for the President to fire Mary Jo White as SEC Chair, because, the Senator contends, under White’s watch the agency has undermined the administration’s priorities, ignored the SEC’s core mission of investor protection, and failed to promulgate or implement disclosure requirements Warren supports.


Senator Warren’s October 14, 2016 letter can be found here and her Senate office’s press release about the letter can be found here.


It is of course nothing new for Warren to attack White. As I noted at the time (here), in June 2015 Warren sent White a letter in which, among other things, the Senator called White “extremely disappointing.” Now with only a few months left in Obama’s Presidential term, the former Harvard Law Professor has launched an attack calling for the President to exercise his “unilateral authority” to designate another SEC commissioner as Chair.


Warren cites a number of concerns about White in the letter to the President, but the most prominent item relates to the agency’s alleged refusal to develop a rule requiring public companies to disclose their political contributions, “despite unprecedented and overwhelming investor and public support for such a rule.”


The agency Chair’s position regarding disclosure is something of a running theme in the letter. Warren notes that White’s “anti-disclosure views extend well beyond political spending.” Warren criticizes White for the agency’s failure to move quickly on disclosure mandates required in the Dodd-Frank Act and other Congressional enactments. In the same vein, Warren attacked White for calling for less disclosure (citing White’s contention that ever increasing disclosure requirements overwhelm investors and make it difficult for them to focus on what is important.)


Warren’s letter states “Chair White’s comprehensive anti-disclosure agenda runs directly contrary to the SEC’s purpose,” and concludes by stating “the only way to return the SEC to its intended purpose is to change it leadership.”


There are a number of remarkable things about Warren’s letter. First, there’s this:  the President is a Democrat, as is Senator Warren. Warren is attacking – or, rather, continuing to attack – someone appointed by a President that is of the same political party.  Even by the standards of the bizarre universe that is political Washington, this is a highly unorthodox move.


Second, it is inexplicable to me that Warren is attacking White. White is an accomplished federal prosecutor widely respected as a “tough cop.” I just don’t get why Warren is going after White so aggressively. O.K, I understand that Warren is trying to pressure White and the SEC to take action on political spending disclosure and other types of disclosure initiatives, but calling for White to be fired seems way more aggressive than the disclosure initiative concern would seem to warrant.


Third, regardless of the reason for Warren’s aggression against White, the timing of Warren’s call for White to be fired seems, at least at first, to be just plain odd. Obama’s term will be over in three months. Just as a practical matter, it seems highly unlikely that the President would make such a move now. There was basically no chance that the letter would accomplish its stated goal to get the President to fire White. In fact, the White House has already issued a statement in response to Warren’s letter stating that “The President continues to believe Chair White is the right leader for the Securities and Exchange Commission.”  So, why do it?


The Wall Street’s Journal’s October 15, 2016 article about Warren’s call for White to be fired (here) has an interesting suggestion about the agenda behind Warren’s letter. The Journal says that Warren’s letter is part of an effort by the Senator and other progressive Democrats “to pull their party to the left and influence the selection of the next round of presidential appointees after the November election.”


The Journal’s suggestion about what Warren may be up to has a ring of truth to it. Even if that is not Warren’s agenda, you do have to worry  that if a tough cop like Mary Jo White is not tough enough for Warren  what kind of person Warren would like to see in that role and in other regulatory oversight roles. You also have to worry about what the regulatory environment for business will be if Hillary Clinton wins the upcoming Presidential election and Warren, an important party ally of Clinton, is able to influence Clinton’s agency appointments. The Wall Street Journal has an October 17, 2016 editorial entitled “Queen Elizabeth Gives Order to Hillary” (here) that makes these same points.


As for White herself, it is important to note that White’s term on the Commission is not set to expire until 2019. Although I have heard rumors that for reasons of her own White may not stick around as agency Chair after the election, there is also nothing that says that White might not remain as SEC Chair for the next several years. It is interesting to note that Senator Warren’s current term as Senator runs until January 2019 (and of course she could run for re-election in 2018, if she wanted to). So it is entirely possible that Senator Warren could continue to badger White for the next three years.


The SEC’S Record Enforcement Activity in Fiscal 2016: As I noted at the outset, there is some irony that Warren’s calls for White to be fired came the same week as the SEC announced record numbers of enforcement actions in the last fiscal year (which ended September 30). Of course, Warren’s criticisms were not directed to the agency’s enforcement efforts, but rather were focused on the agency’s rulemaking and investor protection roles.


Just the same, the agency did announced in its October 11 press release that in fiscal year 2016 it filed 868 enforcement actions, compared to 807 in fiscal 2015 (an increase of about 7.5%), representing the agency’s highest –ever annual enforcement activity tally. The 2016 total also marks the third consecutive year in which the agency has filed a record number of enforcement actions.


The agency’s press release cites a number of reasons for the record number of filings. The record occurred in 2016 as, according to the press release, “the agency continued to enhance its use of data to detect illegal conduct.” The press release also noted that the agency brought a record number of actions against investment advisors and investment companies (160) and also filed the highest number of FCPA-related enforcement actions (21).


It is interesting that that the agency reported a record number of filings at the end of fiscal 2016, because at the end of the fiscal third quarter, the agency’s enforcement action filing pace had fallen below the prior year’s pace, and it looked unlikely that the agency would make up the gap during the final quarter. The fact that the by the end of the fiscal year the agency’s filings eclipsed the filings in fiscal 2015 suggests that the agency was unusually active in the final fiscal quarter.


In her October 11, 2016 Wall Street Journal article about the agency’s enforcement statistics (here), Jean Eaglesham has an interesting analysis that may explain the agency’s accumulating year-on-year increase in the number of filings. Eaglesham noted that though the number of filings has increased, the agency’s recoveries have remained flat, which Eaglesham interprets to mean that the agency achieved the record number of filings by filing more, smaller cases.


Eaglesham cites agency sources to the effect that under White’s leadership, the agency’s enforcement division has adopted a community policing theory called the “broken-windows approach,” in which local police target small problems in an effort to fight crime. Eaglesham’s article details a number of decidedly small bore cases the agency pursued in the last fiscal year – including, for example, a rash of 71 cases filed in a single day in August against issuers of municipal bonds (which may explain in part how the agency closed the filing gap in the fourth quarter).


Whether or not this broken windows approach is effective, it at least allows the agency to report that its enforcement activity has increased.  In her article, Eaglesham notes that, while some may criticize this as a “superficial approach,” the SEC’s leaders (including White) cite the increase “as a tool in their public-relations efforts and to lobby Congress.”


Whether or not it is a valid criticism that the agency is playing small ball to pad its enforcement numbers, the fact is that the SEC is a formidable governmental agency that uses its regulatory and enforcement authority actively and aggressively. The agency’s expansion of its use of data analytics has made it even more formidable. The agency has recently made it clear that it will aggressively use its regulatory authority to go after gatekeepers, including attorneys and accountants. It has zealously pushed its whistleblower program.


As the Morrison Foester law firm noted in its October 12, 2016 memo summarizing the SEC’s enforcement statistics (here), legislators may continue to hound SEC Chair White as soft on wrongdoers and as not doing enough to protect investors, “the data seem to contradict those characterizations.”