Compliance in the Trump Era, Part I: The SEC

SEC Chairman Mary Jo White announced her resignation yesterday, firing the starting pistol for the Trump Administration to reshape financial regulation in this country.

Compliance officers are uneasy about what the incoming Trump Administration might mean to them, and for good reason. Still, we have a few early clues to consider, so let’s try to deduce a few a few probable outcomes.

Paul Atkins, a Republican SEC commissioner from the 2000s, is leading the Trump transition for the SEC, Commodities Futures Trading Commission, and related agencies. Atkins has been holed up at Potomak Partners, a consulting firm that acts as agency-in-exile for former Republican SEC officials awaiting possible return to power. He hangs out there with Kathleen Casey (on the job 2006 to 2011) and Dan Gallagher (2011 to 2015).

Do we know that Atkins, Gallagher, or Casey will be Donald Trump’s choice to lead the SEC? No. Regardless, Atkins will have at least some influence on who that person will be, and more influence on the agenda that Trump will want that person to pursue.

The logical place to start, then, is to explore which issues Atkins considers important: ones he raised when he was on the SEC a decade ago; and ones he’s likely to push now, along with other Trump advocates at the Treasury Department and on Capitol Hill.

We also need to remember that compliance officers will feel the bite of the Trump Administration’s changes in two ways. More immediately, we will see a change in how the SEC treats enforcement and rule adoption. Over the longer term, we might see changes in the scope of what the SEC does, thanks to new legislation.

Two Places to Start

While Atkins was at the SEC in the 2000s, he railed against large fines imposed on companies for corporate fraud, taking the usual Republican line that shareholders already suffered damage from the fraud itself. The better approach, he argued, was to deter misconduct by holding individuals personally accountable.

Atkins also was no fan of freewheeling whistleblower protection laws, nor of the SEC whistleblower rewards program established by the Dodd-Frank Act. (He had already left the SEC by the time Dodd-Frank came along, but testified against it at Senate hearings.) Atkins favored mandatory internal reporting of misconduct before someone could be eligible for a whistleblower reward.

Those two points could carry a lot of implications for the compliance community—and not all of them unwelcome, either. But we need to remember that Atkins (and his Republican fellow travelers) advocated those positions years ago. The question is how those 2000s-era views about corporate penalties and whistleblower protections might fit into our late 2010s regulatory world today.

For example, when Atkins complained 10 years ago that large fines against corporations only harmed investors a second time, the SEC was busy cleaning up accounting fraud from the Enron and WorldCom era. Today the SEC’s largest fines tend to be about non-financial misconduct: violations of the Foreign Corrupt Practices Act, whistleblower retaliation, or even cybersecurity failures.

That is, we have a significant volume of SEC enforcement action where investors don’t suffer direct harm (nowhere near the pain they suffer when an accounting fraud finally unravels in a financial restatement), but misconduct has still happened. So how would Atkins and his colleagues view those cases?

Would they support the Yates Memo standard of full cooperation to identify individual culprits? How much cooperation and investigative support would qualify as “full” anyway? How widespread would misconduct need to be to deserve a fine at the corporate level? (Looking at you, Wells Fargo.)

I suspect Sen. Elizabeth Warren will put questions like that to Trump’s eventual SEC nominees, once those people get confirmation hearings. Compliance professionals will want to listen to the answers.

A Word on Whistleblowers

Second, a large priority for compliance officers today is anti-retaliation against whistleblowers. As I’ve argued elsewhere, the SEC’s Office of the Whistleblower has elevated anti-retaliation into a sea change at Corporate America. We have moved from trying to prevent specific acts of retaliation, toward cracking down on any impediment a company might try to impose on employees’ ability to raise concerns about misconduct.

Repealing that part of the Dodd-Frank Act (Section 922) would be a tough sell. Even Republicans like to protect whistleblowers, although they primarily want to encourage whistleblowing about abuses in government rather than abuses in Corporate America. And above all, repealing Section 922 would take an act of Congress, rather than a policy change from a new SEC chair.

A Republican-leaning SEC, however, could reorganize the Office of the Whistleblower and change its enforcement priorities. For example, nothing in Section 922 says the SEC must have a dedicated whistleblower office; a new chairman could somehow merge those operations into the Division of Enforcement. Likewise, the statute does say, “No employer may discharge, demote, suspend, threaten, harass, directly or indirectly, or in any other manner discriminate against, a whistleblower…”

Do pre-taliation clauses in employment contracts count as indirect harassment? The current SEC leadership believes so. Would new, Trump-selected leadership put that enforcement theory into the grave, and leave whistleblowers to pursue their own claims in federal court? (That’s the recourse allowed under the statute.) Possibly, although that will spark inevitable accusations that the Trump Administration is anti-whistleblower. I don’t know that The Donald will care.

What Really Matters

We’ll be talking more often here about life for ethics & compliance officers under a Trump Administration (I’ll tackle FCPA enforcement within another few days), but we should also remember one prime fact: the Trump Administration’s minions have more important ideological objectives right now. When they talk about “repealing Dodd-Frank” they really mean easing rules for capital formation.

So we’ll have new leadership at the SEC, and how they interpret longstanding policies about cooperation, the scope of whistleblower protection, and the like will be crucial to corporate compliance officers. But the paramount goals for Trump and his administration will be dismantling the Financial Stability Oversight Council, clipping regulators’ ability to name systemically important financial institutions, or rolling out more ideas like Regulation A+ under the JOBS Act. We may also see more discussion of the idea that insider trading is not actually a crime.

Those are enough thoughts for today. We’ll all have plenty more to think about in the days to come.