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Op-Ed | The American Prospect | May 13, 2021

Plumbing The Depths At The SEC

2020 Election/TransitionClimateEthics in GovernmentFinancial Regulation
Plumbing The Depths At The SEC

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Progressives have generally seen Gary Gensler, the newly confirmed chair of the Securities and Exchange Commission (SEC), as a loyal advocate for the public interest. His tenure at the Commodity Futures Trading Commission (CFTC) was one of the few bright spots in Barack Obama’s financial regulatory regime. But in April, Gensler named Alex Oh to be his director of enforcement, before she resigned a week later amid negative media attention. Before joining the SEC, Oh had directly facilitated an ExxonMobil executive’s obstinate deposition testimony (reportedly read off an attorney-drafted script) in the face of plaintiff objections—and the case itself centered on accusations of torture, rape, and murder by ExxonMobil-hired guards in an Indonesian village.

The Oh debacle served as a reminder that reforming the financial system, even for Gensler, is a massive undertaking. Amid a mess of industry money and executives using every strategy to undermine him, Gensler will need to be watched and pushed by public-interest actors throughout his time as a regulator.

Gensler’s work revitalizing the SEC starts with replacing the many Trump holdovers still in office, a fact even members of the right-wing media have realized. He should move quickly to staff up his agency and get to work.

The following are some of the positions with the most massive implications for corporate accountability and climate change, among other issues. These positions should be filled with people who are subject matter experts and climate leaders, and who are not loyal to the corporate world they are expected to regulate.

Office of Enforcement

Gensler clearly identified the importance of the director of enforcement, who leads the SEC’s corporate-accountability work. They will be responsible for conducting investigations into and prosecuting violations of federal securities law. So it is clearly unwise to appoint a director whose loyalties lie with the very corporations they are responsible for prosecuting.

The deputy director of enforcement will also lead the agency’s new “Climate and ESG Task Force,” aimed at identifying misconduct related to environmental, social, and corporate governance disclosures. The SEC, under Acting Chair Allison Herren Lee, began making strides to develop climate risk disclosure standards. Climate finance activists agree this is a necessary first step, albeit the bare minimum. But creating standards means nothing without proper enforcement.

Also relevant to the SEC’s enforcement powers, as John Kostyack of the National Whistleblower Center recently argued, is the agency’s whistleblower program. The Office of the Whistlebloweris housed within the Division of Enforcement, meaning it’s up to the enforcement director to ensure insiders feel safe exposing corporate wrongdoing. Polluting corporations in particular will undoubtedly try to worm their way out of disclosing the truth of their climate-damaging assets. Whistleblowers who have insider information about fraudulent behavior should be encouraged to utilize the SEC’s existing procedures, and this is another reason why it would send a dangerous message for the enforcement director to come out of corporate C-suites and BigLaw defense firms.

Director of Corporation Finance

The SEC’s Division of Corporation Finance acts as a watchdog over initial public offerings, in which a company starts selling stock for the first time and goes through a lengthy legal process to inform the public about its assets and liabilities. The division was overseen in the Trump era by William Hinman, a revolver from BigLaw firm Simpson Thacher & Bartlett. Hinman worked on the IPOs for companies linked to Big Tech, including Facebook and Google, and the massive public offering for the Chinese e-commerce company Alibaba. He was the first corporation finance director in years to come from Silicon Valley, and his tenure just so happened to align with the disappointing IPOs of so-called “unicorns,” including Uber, Lyft, Slack, and of course WeWork.

Over time, investors grew hesitant to bet big on firms that don’t, you know, make money. So Hinman did as the venture capitalists wanted, and made the IPO process more opaque, benefiting the rising number of SPACs, or special purpose acquisition companies. As the Prospect’s David Dayen has written, SPACs serve as shells for companies going public that do not want to disclose basic facts to investors. See, if investors don’t know that your company doesn’t make any money, they’ll still buy your stock and the venture capitalists can still walk away rich.

Undoing this damage will be a top priority for Gensler’s pick. The current acting director of corporate finance, John Coates, rightfully identified the need for ESG disclosures and the rise of SPACs as two of the three biggest issues facing the division earlier this year. Coates, a former Harvard Law professor, recently filed a personal financial disclosure acknowledging consulting work for Twitter, Thompson Petroleum Corp., and corporate BigLaw firm White & Case. However, Coates has taken significant steps to incorporate a risk framework into the SEC, saying in April 2021 that action on ESG disclosures was “overdue,” and would be moved forward within the year. Coates has also, in the face of rising bipartisan pressure, promised to crack down on SPACs using intentionally false or misleading projections, although the agency has still not released guidance on SPAC projections.

Director of Trading and Markets

The SEC’s Division of Trading and Markets is the top regulator for all stock exchanges, and the overseer of self-regulatory organizations like the Wall Street-financed Financial Industry Regulatory Authority (FINRA). This position is easiest to understand in the context of what it hasn’t regulated, leading to two truly horrifying market failures in recent years. The first was its failure to regulate global financial services firm Lehman Brothers, which ultimately contributed to the 2008 financial crisis. More recently, the SEC failed to regulate Archegos Capital Management—Archegos used derivative bets and swaps to keep billions in investments secret, and when it collapsed in 2021, it caused billions of dollars of losses to banks worldwide.

The Division of Trading and Markets will also be responsible for ensuring that fintech companies act as responsible traders. The 2021 GameStop trading frenzy showed the importance of making fintech play by the rules; when Robinhood allowed trading beyond their capital, they were forced by the Division’s capital adequacy rules to stop customers from buying stocks and raise emergency money amounting to between $500 million and $600 million.

These will be crucial years for the Division’s power to define and regulate securities. The SEC is currently suing Ripple, makers of the world’s third-largest cryptocurrency. The SEC alleges that Ripple’s coins have no actual use case except as a tool for financial speculation. (Others have argued that this extends to the entire cryptocurrency field.) If that’s true, Ripple and other business-issued coins should probably be designated as securities, with all the rules and regulations that implies. Case in point for this job’s importance on crypto: Trump’s director of trading and markets Brett Redfearn recently joined the private cryptocurrency exchange Coinbase.

General Counsel

The SEC’s general counsel is a lawyer mostly advising other lawyers (the commissioners) on technical nuances of administrative and regulatory law. The general counsel also handles all of the Commission’s non-enforcement-related legal work, including defending it from lawsuits under the powerful Administrative Procedure Act.

That function will obviously be relevant if Gensler really shakes up business as usual on Wall Street. Expect the industry to meet every ambitious proposal with at least three lawsuits. Any Wall Street lawyer looking for a job after their time in government won’t want to go beyond established norms of timid enforcement and cause problems for the firms they hope will employ them, so if an insider is appointed, they’ll likely offer the weakest possible arguments for the public’s side.

The current acting general counsel, Michael Conley, has been with the SEC since 2000. We certainly don’t see any particular revolving-door concerns with him. Whoever gets the permanent job, though, must show commitment to taking action even in the face of industry hostility.

Office of the Ethics Counsel

While the SEC’s main focus is to regulate economic happenings outside of its doors, there is potential for enormous wrongdoing on the inside as well. Enter the Office of the Ethics Counsel, which counsels employees and commissioners on their own possible financial conflicts of interest, including securities holdings and transactions.

This office also advises SEC employees on their “post-employment restrictions,” which has a serious impact on the state of the revolving door. This is not a position that Gensler can afford to toss out to any old corporate loyalist. The current director, Danae Serrano, was appointed under Trump but does not have a record of revolving, having worked in the SEC since 2010. Anyone trusted by Trump officials to prevent corruption deserves more than a passing glance, though, so we hope Gensler thinks carefully about this role.

PCAOB

Finally, there’s the SEC’s duty to oversee one of the least known and most relevant corners of the federal government, the Public Company Accounting Oversight Board (PCAOB, which insiders pronounce “peekaboo”). As the Prospect’s David Dayen documented, Trump SEC Chairman Jay Clayton swept out the entire Obama-era leadership, installed “Shelby mafia” member William Duhnke as PCAOB chair, and permitted him to go on a tear of retaliatory firings.

The PCAOB is supposed to prevent Enron-style mass fraud, in which publicly traded companies use “creative” (fraudulent) accounting to mask debts and bilk investors, including retirement funds that lost billions in the Enron scandal. This is especially important in a retail investor–heavy world: The Project on Government Oversight found in 2019 that the Big Four auditing firms, which audit 100 percent of Fortune 500 companies, all regularly produce audits so shoddy as to be effectively worthless (between 20 and 50 percent of audits surveyed, varying by auditing firm). POGO reached that conclusion based on data from—where else?—the PCAOB. A strong PCAOB will be necessary to hold auditors accountable for separating accurate disclosures from fictitious ones.

Gensler should fire all of the Trump-era board members, as Clayton did with the Obama PCAOB, replacing them with new members who actually care about the agency’s vital mission. This isn’t just the right thing to do, it’s the right political thing to do. Using the right’s tactics against them, and for the public interest, would show that Gensler doesn’t care about appeasing conservatives who ideologically hate his Commission: He cares about protecting the little guy from fraud.

We hope Gensler will heed the call of this moment and appoint directors who are loyal to the public good rather than corporate profits. And Gensler should not fear backlash—the public supports him using a heavy regulatory hand on climate issues, and Wall Street is one of the most reviled sectors in America. When he chooses to make the difficult but necessary choice to stand up to Wall Street on behalf of financial stability, the climate, and the well-being of its Earth-dwelling residents, he will be a much-appreciated man.

Photo: “Securities and Exchange Commission Headquarters Building” bySecurities and Exchange Commission is licensed under CC BY-NC-SA 2.0

2020 Election/TransitionClimateEthics in GovernmentFinancial Regulation

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