Can SEC staff hold the line? We're not in Kansas anymore, folks.
We'd like to think SEC staff will be able to resist any increasing politicization of the regulator, but academic research, and experience, says that may be comfortable myth not reality.
There are no shortage of takes on what might happen in the SEC in the next administration. But given how quickly we are are hearing about other major proposed appointments, it may not be long before Gary Gensler quits or is fired and we finally know who they want for SEC Chair.
I am going to focus in future write-ups on specifics. That is, I will focus on what those who have been through this before have said about the importance of steadfast leadership at the SEC and how that determines the specific cases we may see.
On November 10, when I wrote about the “Day After” panel at the Securities Enforcement Forum in Washington D.C., I commented about remarks from elder statesman Bill McLucas:
So, this is the opinion of an institutionalist, a person who has worked through revolutions before, in his case the Reagan Revolution, who says that the center will hold. He reassures us that there will always be bad guys, which is not that comforting, really.
What I am not sure about is if he just reassuring the SEC professionals they will still have a job and the former SEC white collar defense folks they will still have people to defend, or if he is trying to reassure everyone that rule of law will prevail.
McLucas’ remarks were in reference to concerns that more political appointments at the SEC — abandoning OPM guidelines and going down a level to make deputy directors, as well as Directors and Commissioners, politically inflected appointments — may mean that the White House, not the rule of law, would drive SEC activity, especially in Enforcement.
Although everyone on his panel agreed that the choice of SEC Chair would be the determining factor in the level of politicization of the SEC, not everyone was as confident as McLucas that rank and file staff — the career civil servant SEC — would continue to do the work, without “fear or favor”.1
Those worries are supported by academic research on the subject.
Professor Andrew Jennings, in his paper “Conscience Leave”, published in 2021 in the Notre Dame Journal of Law, Ethics and Public Policy, is not so sanguine about lawyers standing up for their principles.
In the federal government, political officials come and go while civil servants remain. In the ordinary course, the political officials make decisions about what policies the government will pursue while civil servants use their labor and expertise to carry those policies out––even when they disagree with them. But what happens when political officials pursue policies that civil servants view as deviating from normal bounds–– policies that are unethical, immoral, or unlawful? This Article examines when and how civil servants might object to such policies, including going so far as to leave government service. It concludes that when faced with such situations, employees’ personal benefit-cost analyses will generally lead them to not object to deviating policies.
Of the costs federal employees must consider, the dominant one is usually economic: They need a job and cannot afford to leave one without having another lined up. Although existing civil-service rules partly reduce this cost—such as through giving anti-retaliation protections to whistleblowers—those protections are often insufficient to motivate objection.2
The example Jennings uses to illustrate his point is the child-separation policy of the first Trump administration.
The child-separation policy was the choice of political leaders, but it was the work of career employees. Assistant U.S. attorneys in border districts used their professional skills to implement a zero-tolerance prosecution program that would necessarily require that children be separated from their parents and placed into CBP custody. The attorney general expected them to do so “until all available resources”—in other words, their labor and expertise—“were exhausted.”23
CBP personnel custodied the children in deplorable conditions. And DOJ attorneys defended it. Oral argument in the government’s appeal from a district court order that CBP provide hygiene items to the children gained national attention in part because it personified the work of civil servants in carrying out such deviating policy.24
23. See OIG Report, supra note 11, at 40–41.
24. See Manny Fernandez, Lawyer Draws Outrage for Defending Lack of Toothbrushes in Border Detention, N.Y. TIMES (June 25, 2019), https://www.nytimes.com/2019/06/25/us/sarahfabian-migrant-lawyer-doj.html; Ken White, Why a Government Lawyer Argued Against Giving Immigrant Kids Toothbrushes, ATLANTIC (June 23, 2019), https://www.theatlantic.com/ideas/arch ive/2019/06/why-sarah-fabian-argued-against-giving-kids-toothbrushes/592366 (describing the government’s argument as “morally indefensible” but arguing that “[t]he fault lies not with any one administration or politician, but with the culture: the ICE and CBP culture that encourages the abuse, the culture of the legal apologists who defend it”.).
Professor Jennings also cites Professor Kathleen Clark, a Professor of Law at Washington University, who in her study of 142 protest resignations during the Trump administration, found that only 21 were by civil servants. The rest were by political appointees, and many were part-time officials serving on advisory boards.
“Of those who publicly resigned in protest, 85% were individuals who already had other full-time means (that is, they merely served part-time on advisory committees) or were full-time political appointees and, thus, likely had personal connections and prestige that would allow them to quickly find new employment. Of course, during that time many civil servants might also have resigned in non-public protest, but it is telling that in this sample, those who relied most on their positions—civil servants—were least likely to resign despite vastly outnumbering those holding political appointments.”3
I spoke to Professor Jennings, of Emory University, about his research. He agreed that the choice of Chair would be directionally critical. SEC staff will take their cues from the Chair but still expect to operate independently. However, Jennings reminded me that, when they disagree strongly with leadership, SEC staff can opt out more quickly and easily than most other federal agency staff.
“SEC attorneys are well-positioned to move to private practice or industry positions, often at much higher compensation the civil service offers. And if the SEC systematically declines to take certain kinds of cases or cases against certain entities, that opens it up for state regulators and private plaintiffs to go after those cases. Often state regulators defer to the SEC and DOJ, but they might not if there's an enforcement lag at the federal level. So, there are alternate career paths for SEC professionals and alternate enforcement options for other enforcers.” Professor Andrew Jennings
Here’s Jennings in another paper, “State Securities Enforcement'“ published in 2021 in Brigham Young University Law Review:
Although states share enforcement jurisdiction with the SEC and DOJ, their enforcement activity reflects their institutional advantages and constraints and thus largely does not overlap with that of federal authorities. Instead, states serve as the nation’s residual securities enforcers, policing local misconduct that federal authorities or private plaintiffs largely do not.4
One place SEC attorneys rarely go, but could now consider if they feel strongly about cases the SEC and DOJ aren’t taking, is the plaintiffs bar. Law professor Alex Platt of the University of Kansas explored this strange phenomenon.
This paper shows that the door between the SEC and the plaintiffs’ bar does not revolve. Among other things, I show that none of the ten leading plaintiffs’-side firms employ anyone with recent SEC experience doing plaintiffs’ side litigation; none of the enforcement attorneys I identified as working for the agency in 2015 left to do plaintiffs’ side litigation; none of the current upper- and middle-managers in the SEC’s enforcement division have any prior plaintiffs’ side experience; and only five of the enforcement attorneys I identified as working for the agency in 2019 had prior plaintiffs’ side experience.
Professor Jennings also mentioned to me that there is also a lot of talk that M&A is going to be back in a big way. SEC attorneys are also well-positioned to do that work in private practice.
Reilly Steel, an Academic Fellow and Lecturer in Law at Columbia Law School, also has a new paper out that finds:
“…about half of SEC investigations involve firms that actively lobby and about a quarter involve firms with active PACs, more than double the rate for the broader universe of firms. On the intensive margin, average lobbying expenditures and PAC contributions are much higher for firms under investigation than other firms, even limiting the comparison to politically active firms. Political spending thus appears to be relatively common and intense for firms that have run into regulatory trouble.”
Steel’s paper5 also finds that “chief executive officers respond to investigations by engaging in strategic behavior similar to firms, increasing the amount of their campaign contributions and increasingly favoring incumbents.”
Overall, Steel’s results suggest that firms regularly use political spending as a strategic tool to avoid SEC enforcement. (Steel uses, in addition to new data, FOIA results from earlier researchers I wrote about with regard to undisclosed SEC enforcement actions.)
No one can deny that there have been record amounts of political spending this cycle. Before the election, The Financial Times interpreted another one of Steel’s papers6 about a different perspective: that corporate America was shifting left. Suffice to say that did not hold true in the ballot box, at least for the presidential race.
The corporate world has taken a progressive turn, while polarisation is also on the rise by JOHN BURN-MURDOCH
This finds that the political views of America’s corporate elite have shifted significantly to the left in the past two decades, and that this change in managerial class values has driven the recent wave of corporate social activism.
Using data on millions of political donations made by tens of thousands of executives, board members and senior managers since 2001, Steel finds that the median US CEO is no longer solidly on the right. Instead, he or she is now a political moderate, while senior managers today are overwhelmingly left-leaning.
Behind the paywall I dig into what SEC veterans, and more lawyers, are saying, in private and in public during one more Securities Enforcement Forum panel.
