Using the private sector to strengthen the SEC
The SEC's Enforcement Division can be more effective if we restore its ability to tap the talents of America's top privatem sector attorneys.
President Donald Trump has sharply criticized Wall Street for the "tremendous problems" it has caused our country and promised, "I'm not going to let Wall Street get away with murder."
However, Trump's pick to lead the US Securities and Exchange Commission, Jay Clayton, is a Wall Street deal lawyer with a career spent representing big banks and other large companies. Clayton's nomination signals that the agency's focus may be on capital formation, not enforcement.
Trump can prove his commitment to policing financial fraud by reversing Executive Order 13433, which prevents the SEC and other federal agencies from partnering with private law firms on a contingent-fee basis.
Let the free market work
Restoring the SEC's ability to enter public-private partnerships with top-tier securities firms would give the agency a powerful enforcement tool without requiring a dime of additional government funding.
Public-private partnerships are not only an ideal solution to one of the nation's greatest challenges -- enforcing our securities laws against powerful corporations and executives -- but a prime example of letting the free market do what it does best: allocate resources efficiently.
The SEC clearly has its problems. As Columbia Law Professor John Coffee has emphasized in several books and articles, the SEC is "overstrained and underfunded," and outmatched by the experience and resources of corporate America's top-tier defense counsel, leaving it "particularly vulnerable" in big cases. Indeed, the SEC missed Bernie Madoff's decadeslong investment fraud despite repeated warnings, and failed to prosecute a single case against a top bank executive for financial crisis-era misconduct.
The SEC's problems are exacerbated by Executive Order 13433. President George W. Bush signed this executive order in 2007 amid complaints by corporate lobbyists after private contingent-fee counsel successfully partnered with state attorneys general to recover over $200 billion from the tobacco industry.
At a time when all sides acknowledge the SEC's need for more resources, Executive Order 13433 represents outdated thinking and hamstrings the agency's enforcement power. In the past few years, Executive Order 13433 has limited the SEC's ability to pursue many challenging and meaningful enforcement actions.
Notably, in circumstances where this executive order did not apply, other government agencies have worked with private counsel to secure massive recoveries in complex litigation arising from the financial crisis, which cost the US economy more than $22 trillion. The Federal Housing Finance Agency (FHFA) recovered nearly $19 billion in connection with the sale of mortgage-backed securities, and the National Credit Union Administration (NCUA) recovered more than $4 billion for creditors of failed financial institutions. In the NCUA chair's own words: "Without this fee arrangement, which shifted most of the risk of these legal actions to outside counsel, there would have been no legal investigation of potential claims, no litigation, and no legal recoveries."
In contrast to the $23 billion recovered by these agencies through public-private partnerships, the SEC -- laboring without a deep and talented pool of private litigators -- has levied less than $4 billion in penalties, disgorgement, and monetary relief in all of its financial crisis-era cases.
A powerful tool
Restoring the SEC's ability to enter publicprivate partnerships with top-tier securities firms would give the SEC a powerful enforcement tool without requiring a dime of additional government funding. It would also allow the SEC to focus its scarce resources on other objectives, such as capital formation, reducing unnecessary regulations, and improving corporate transparency.
As for enforcement, to quote Coffee, the SEC would be able to "focus on what they are best at: insider trading, Ponzi schemes, and smaller frauds not involving a complex institutional structure and multiple actors." Sophisticated privatesector counsel would be available to assist the SEC in the largest and most complex cases, where it most needs help.
Both Trump and the Republican Party strongly support the efficiencies and advantages offered by public-private partnerships. Trump "the Developer" has partnered with government entities to build hotels, convention centers and ice rinks. Trump "the Candidate" and the 2016 Republican Party platform both emphasized public-private partnership as essential to "save the taxpayers' money" by controlling the costs of infrastructure and government spending.
The same policy thinking supports allowing the SEC to utilize private-sector law firms to aid the agency in effectively enforcing securities laws.
Trump promised to "police markets for force and fraud" and hold "both Wall Street and Washington accountable." Trump can take a significant step toward fulfilling these promises by rescinding Executive Order 13433 and restoring the SEC's ability to obtain private-sector legal services at no cost or risk to the American taxpayer. With a pen stroke, he can make the SEC a better financial cop and transfer risk to the private sector, while silencing those who would criticize the Clayton nomination as signaling a laissez-faire attitude toward enforcement.
Trump "the Candidate" and the 2016 Republican Party platform both emphasized public-private partnership as essential to "save the taxpayers' money" by controlling the costs of infrastructure and government spending.