Prepare for more enforcement under a new SEC chief

Want tougher enforcement of rules governing financial institutions? That’s what corporations should expect under Mary Jo White, whose confirmation as the new director of the Securities and Exchange Commission (SEC) could come this month, according to Ryan Work, senior director of government affairs at McGraw-Hill.

In a webinar on March 5 hosted by Neil Stewart, editorial director of IR and Corporate Secretary magazines, Work discussed how the change in leadership of the SEC will affect US corporations.

Work predicted that White’s confirmation by the Senate Banking Committee will be fairly smooth, but it could be slowed down by the Senate’s decision to combine her hearing with the one for Richard Cordray, whose 2011 appointment as the first director of the Consumer Financial Protection Bureau was initially rejected by Congress.  

And while White’s experience as a federal prosecutor is ‘what Congress is looking for in the wake of Dodd-Frank,’ according to Work, her work as a lawyer on behalf of Wall Street clients such as JP Morgan Chase and former Bank of America chief Kenneth D. Lewis may demand that she recuse herself from a couple of cases during her first year leading the agency. ‘That could lead to some interesting votes if they don’t have a clear majority,’ he said.

Market watchers are concerned that conflicts of interest may arise if the SEC takes action after the Office of the Comptroller of the Currency (OCC) in January ordered JP Morgan Chase to make changes under its Bank Secrecy Act program to better track suspicious transactions in the wake of an estimated $6 billion in losses last year from synthetic credit derivatives traded through the main investment office in London. The OCC cited the firm’s inadequate system of internal controls and independent testing. Separately, the Federal Reserve Board has ordered JP Morgan Chase’s board to ensure that the parent company thoroughly backstopped its primary bank subsidiary.

White’s hands would be tied if such a case reached the commission. And adding to that problem, there could be a need to fill vacancies for up to three of the SEC’s five commissioners, as well as other open staff positions that has resulted in ‘a loss of institutional knowledge,’ and rule-making delays, Work said. 

Concerns over potential conflicts of interests at the SEC are not confined to personnel. To make up for past oversight failures and to close a technology gap with the market it is supposed to supervise, the SEC recently purchased an advanced technology platform that promises to save staff members time, freeing them up to pursue enforcement actions. Ironically, the platform comes from a hedge fund that probably used its state-of-the-art functions for high-frequency trading, one of several financial practices the SEC is determined to monitor more closely. Unfortunately, ‘that’s one of the only ways the SEC can get that technology,’ Work said. 

New SEC rules in April governing disclosure of political contributions by corporations will probably be ‘a game changer,’ according to Work. These could include orders that companies issue annual statements of their contributions as well as any participation in trade associations’ lobbying activities.

‘Partially because of Dodd-Frank rule-making, corporations realize they need to be engaged [in advocacy with agencies such as the SEC],’ if only to avoid stricter impact from any new rules, Work said. Although that will make companies think harder about how they spend money, he does not foresee any retreat from political spending.

Work does see pro-active settlements by companies such as Qualcomm and Walgreens ahead of more stringent rules regarding political contributions being forced on them as a model that other corporations may want to follow.

Work also believes Congress will continue to review what has gone right and wrong with executive compensation rules put into effect three years ago under Dodd-Frank. New rules concerning clawbacks could be disruptive with the SEC mulling a requirement that companies look back as far as three years on their financial statements.

‘Clawback provisions are making executives rethink the way compensation is done,’ such as increasing base pay so as to protect a larger percentage of executive salaries from clawbacks in later years, said Work.

Overall, domestic companies should find themselves subject to more rules, even outside the United States. ‘We’re seeing companies putting the highest regulatory standards in place as the bar to meet’ instead of opting for a patchwork of regulations by jurisdiction, Work said.