My former colleague, Senator Elizabeth Warren , recently wrongly accused Chair Mary Jo White of the Securities and Exchange Commission, a former prosecutor, of being an "extremely disappointing" leader and providing the U.S. Senate with "misleading information." While this rhetoric may grab the public's attention, her charges actually ring hollow and fail to further the important debate of how the SEC can make capital markets better serve U.S. companies and investors.
Senator Warren asserts that Chair White has granted "special regulatory privileges" to large public issuers, like JP Morgan and Citigroup , by granting waivers that allow them to continue to qualify as "well-known seasoned issuers" (WKSIs) despite their convictions of securities-law violations. WKSI status allows such issuers to register securities offerings on "shelf" registration statements that are automatically effective when filed. This allows WKSIs to sell securities immediately, instead of waiting for the SEC to review individual filings. WKSI offerings are also simplified because the shelf registration statement has fewer disclosure requirements, thus avoiding repeating information already included in the company's other public filings. By streamlining their review of company filings, the SEC's use of the WKSI designation helps to conserve the agency's limited resources.
However, rejecting these waivers would not protect investors, it would just increase the cost of offerings. If Sen. Warren thinks that the fines paid by financial institutions convicted in the foreign exchange and Libor scandals, which are in the range of $7 billion, are insufficient, then she should say so. Increasing effective fines by imposing useless compliance costs is just plain silly.
Senator Warren also focuses on a single enforcement action where Chair White's recusal may have contributed to a reduction in fines against Computer Sciences . This is one case out of the over 1,400 enforcement cases brought by the SEC since Chair White took office in April 2013. Indeed, the vast majority of Chair White's recusals have resulted because of her prior valuable experience in both prosecuting and defending U.S. companies.
Sen. Warren is also critical of the failure of the SEC to demand more admissions of wrongdoing by companies as part of the settlement of charges. But what does such an admission accomplish other than again imposing additional penalties, by perhaps damaging the reputation of a firm?
The SEC's focus should be on holding the responsible individuals accountable, not imposing large penalties on innocent shareholders like pension funds. Indeed, the SEC should be commended for now focusing more on individuals through its administrative proceedings, although it is important to give individuals in these proceedings adequate due process.
Sen. Warren goes on to criticize Chair White for failing to prioritize the rulemakings that Sen. Warren views as most important, singling out CEO pay disclosure rules and campaign spending rules. Senator Warren even goes so far as to suggest that Chair White intentionally misled the senator about the timing of the rulemaking process for CEO-pay disclosure.
However, Dodd-Frank rulemaking has been delayed by many agencies. As of March 31, there were 91 unfinished Dodd-Frank rules that have missed their deadline. The objectives of the rules highlighted by Sen. Warren, if worthwhile at all, are clearly not at the heart of the Dodd-Frank legislation, which is to insure financial stability. If Sen. Warren is really interested in protecting shareholders from losses and our economy from another recession, this should be her priority, too. These important SEC rules include implementation of the Volcker Rule and money-market-fund reforms.
And is criticism related to the lack of timely rulemaking appropriately leveled at Chair White? Or, does the lack of timely rulemaking have more to do with Congress's failure to provide the SEC with the resources necessary to complete its Dodd-Frank obligations? Although the budgets of certain agencies, including the Office of the Comptroller of the Currency and the Federal Reserve , have increased from between 30 percent and 40 percent since the passage of Dodd-Frank, the SEC's annual funding has increased by just over 10 percent. Has Sen.Warren publicly advocated for more funding for the SEC?
Going forward, there are many issues that deserve higher priority than Sen. Warren's populist causes. For example, Chair White has rightly prioritized reforms to U.S. equity markets. Since the last comprehensive set of SEC reforms in 2005, the U.S. equity markets have undergone dramatic change and a revamp of regulation is needed. In addition, the implementation of a consolidated audit trail would provide the SEC with the necessary capabilities to oversee today's fragmented and high-speed marketplace and be a better "cop on the beat."
Our attention should not be on Sen. Warren's flimsy attacks on Chair White. Instead we should be focused on the completion of regulations that would actually protect investors and ensure that our markets remain competitive. This is hard work that would make a real difference for our country.
Commentary by Hal S. Scott, a professor at Harvard Law School and the director of the non-profit Committee on Capital-Markets Regulation. He is also the author of the law-school textbook "International Finance: Transactions, Policy and Regulation" and "The Global Financial Crisis." Follow him on Twitter @HalScott_HLS.