From the Washington Post: SEC chair to step down, clearing path for Trump to eliminate tough Wall Street regulations

We discussed the Securities and Exchange Commission in GOVT 2305 when we covered both the executive branch and economic policy. It is an independent regulatory commission with the following mission: to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation. Liberals have been attempting to use its power to reign in the financial sector following the financial crash of 2008. Those efforts now seem over with Trump's election.

- Click here for the article.

Mary Jo White, the head of the Securities and Exchange Commission, announced Monday that she will step down nearly three years before the end of her term, clearing the way for President-elect Donald Trump to reshape the way Wall Street is regulated.

The SEC, which polices Wall Street and the financial markets, has been a key part of the Obama administration’s effort to rein in big banks following the 2008 financial crisis and prevent future taxpayer bailouts of the industry. The agency has pushed for more oversight of hedge funds and other asset managers, and established rules that make it more difficult for big banks to make risky bets on the markets.

White, a former federal prosecutor, is known for a no-nonsense style and attempted to beef up the agency’s enforcement efforts over the last three years, pushing for more companies to admit guilt and taking more cases to trial. But progressive Democrats were often critical of her efforts, complaining they did not go far enough.

Trump has already indicated he would usher in a period of deregulation, including dismantling 2010’s financial reform legislation, known as the Dodd Frank Act. He appointed Paul Atkins, an industry veteran, who has called Dodd Frank a“calamity,” to lead the agency’s transition.

Atkins “is a guy in general who wants to let companies do their thing and not get in the way very much,” Ian Katz, a financial policy analyst with the research firm Capital Alpha Partners, said of Atkins. “You would see a lighter touch on enforcement and a lighter hand on corporate governance issue broadly.”

Atkins served as an SEC commissioner for six years during the President George W. Bush administration.

For more:

- U.S. Securities and Exchange Commission.
- Mary Jo White.
- Securities Exchange Act of 1934.
- Independent Regulatory Agencies.

From In These Times: The SEC’s Danger of Regulatory Capture How the “cozying up” at the SEC is just another example of regulatory capture.

For our look at regulatory agencies and regulatory capture.

- Click here for the article.

The phrase “regulatory capture” shrouds a serious problem in vaguely academic jargon, making it seem like unimportant esoterica rather than anything noteworthy. But the phenomenon that the euphemism represents is, indeed, significant: When a government agency is effectively captured by—and subservient to—the industry that agency is supposed to be objectively regulating, it is a big deal.

A perfect example of regulatory capture came earlier this month from the Securities and Exchange Commission—the law enforcement agency that is supposed to be overseeing the financial industry.

As part of that responsibility, the agency's top financial examiner, Andrew Bowden, warned last year of rampant fraud, corruption and abuse in the private equity industry, which today manages tens of billions of dollars of public pension money for states and cities across the country.

“When we have examined how fees and expenses are handled by advisers to private equity funds, we have identified what we believe are violations of law or material weaknesses in controls over 50 percent of the time,” Bowden said in that 2014 speech.
That, unto itself, doesn't sound like regulatory capture—in fact, it sounds like quite the opposite. But that's just the prelude to the real story.

Less than a year after raising those red flags, Bowden appeared at a Stanford Law School conference that the school said was designed “to encourage dialogue among the SEC; academics (and) members of the private equity and venture capital industries.” At the March event, Bowden was caught on film expressing his deep affinity for the same industry he had only months before said was plagued by rampant corruption.

"This is the greatest business you could possibly be in—you’re helping your clients,” he said. “The people in private equity, they’re the greatest, they’re actually adding value to their clients, they’re getting paid really really well.” Bowden then added: “I have a teenaged son, I tell him, “Cole, you want to be in private equity. That’s where to go, that’s a great business, that’s a really good business. That’ll be good for you.” That aside was met with an audience member telling Bowden: “I’d love to hire your son.”

Upon seeing the video, former bank regulator William Black wrote: “I would have asked for the resignation of any of my staff who made remarks even remotely like Bowden’s remarks. As financial regulators, particularly if we have the disadvantage of coming from the industry, we maintain at all times a professional distance from those we regulate. The remarks about his son are so beyond the pale that they demonstrate he is incapable of even pretending to maintain such a professional distance. His cheerleader nature is on full display.”

For more:

- Behind the SEC’s Revolving Door.
- The SEC's Revolving Door.
- Capture at the SEC? Let’s Pause for a Sec.
- Why the S.E.C. Didn’t Hit Goldman Sachs Harder.

The Revolving Door: Bracewell & Giuliani attorney to head SEC's Texas regional office

Students will notice that I like to discuss this central feature of politics on all levels of government - one that helps tie interest groups with the various branches of government. This can negate the checks and balances and make it more likely that these branches work together to provide benefits for a well connected group. One of the more effective ways to do so is to control the executive agency that regulates the industry the group is involved in.

This story is today's illustration of this phenomenon;

- Click here for it.
- Click here for a bio of Shamoil T. Shipchandler.

The individual in question went from the U.S. Justice Department (where he served as "Assets Forfeiture Chief" and focused on fraud) to Bracewell & Guiliani (where he represented clients accused of fraud. Now he is expected to take those skills to the Securities and Exchange Commission. If you are paying attention, this means that Mr. Shiplander has gone from prosecuting white collar crime to defending white collar crime to regulating white collar activities.

Note that Bracewell & Guiliani is not only a law firm, but a lobbying form as well - the two jobs overlap.

From the story:

Legal experts said the SEC's decision to make Shipchandler, 41, the regional director is likely a sign that the agency's leadership wants its Texas enforcement division to focus more on fraudulent activity by businesses and individuals and less on technical violations of federal securities laws.

Critics might wonder how forcefully he might do so given the relationships he developed at Bracewell & Giuliani and where he might seek to go after his tenure at the SEC is over.

For background and related class concepts:

- Wikipedia: Revolving Door.
- Open Secrets: Top Industries.
- Rolling Stone: Revolving Door: From Top Futures Regulator to Top Futures Lobbyist.
- Bracewell & Guiliani.
- Wikipedia: Regulatory Capture.
- Wikipedia: Bracewell & Guiliani.

From Pro-Publica: TurboTax Maker Linked to ‘Grassroots’ Campaign Against Free, Simple Tax Filing

Just in time for tax day, a story that points out how interests groups can try to influence public opinion.

- Click here for the full story.

Over the last year, a rabbi, a state NAACP official, a small town mayor and other community leaders wrote op-eds and letters to Congress with remarkably similar language on a remarkably obscure topic.

Each railed against a long-standing proposal that would give taxpayers the option to use pre-filled tax returns. They warned that the program would be a conflict of interest for the IRS and would especially hurt low-income people, who wouldn't have the resources to fight inaccurate returns. Rabbi Elliot Dorff wrote in a Jewish Journal op-ed that he "shudder[s] at the impact this program will have on the most vulnerable people in American society."

"It's alarming and offensive" that the IRS would target the "the most vulnerable Americans," two other letters said. The concept, known as return-free filing, is a government "experiment" that would mean higher taxes for the poor, two op-eds argued.

The letters and op-eds don't mention that, as ProPublica laid out last year, return-free filing might allow tens of millions of Americans to file their taxes for free and in minutes. Or that, under proposals authored by several federal lawmakers, it would be voluntary, using information the government already receives from banks and employers and that taxpayers could adjust. Or that the concept has been endorsed by Presidents Obama and Reagan and is already a reality in some parts of Europe.

So, where did the letters and op-eds come from? Here's one clue:

Rabbi Dorff says he was approached by a former student, Emily Pflaster, who sent him details and asked him to write an op-ed alerting the Jewish community to the threat.

What Pflaster did not tell him is that she works for a PR and lobbying firm with connections to Intuit, the maker of best-selling tax software TurboTax.

"I wish she would have told me that," Dorff told ProPublica.

The website of Pflaster's firm, JCI Worldwide, had listed Intuit among its clients, but removed it after ProPublica contacted them. Pflaster said Intuit had been listed by mistake, but added that the firm does work for the Computer & Communications Industry Association (CCIA), a trade group of which Intuit is a member. Pflaster also said her firm has reached out to multiple groups and encouraged them to share information about the "flaws" of return-free filing.

Update on the story from Slate.

Theoretically, it should be far easier for Americans with simple finances to file their tax returns. Instead of making tax filers putz around W-2s and tax prep software, the IRS could electronically prepopulate their paperwork with the information it already receives from banks and employers, and tell filers how much they owe. If the final figure looked about right, you’d have the option to file. As Matt Yglesias wrote here last year, the whole process could be a five-minute snap.

Theoretically. But for years now, Intuit, the maker of TurboTax, has fought tooth and nail to prevent automatic tax filing from becoming a reality, lobbying against bipartisan legislation to introduce it with the help of a powerful tech industry trade group and conservative anti-taxers like Grover Norquist. Intuit and its competitors in online tax prep don’t want the government cutting its market share. The tax-crusaders want to ensure that paying the government remains as much of a painful, resentment-generating slog as ever. And thus a potent alliance has been born.

Today, ProPublica, which published a great report on this subject last tax season, explains that the Computer & Communications Industry Association, which counts Intuit as a member, has been sponsoring an astroturf campaign to convince Congress that easyfiling would end up hurting the poor. A public relations firm working on the trade group’s behalf has been luring unsuspecting spokespeople to join its cause—reaching out to them without mentioning any lobbying ties.

A some random stories regarding the federal bureaucracy

Three stories for 2302 students to chew on:

1 - The Food and Drug Administration eases rules in order to deal with the shortages of two cancer drugs. Key part of the story:

There is a years-long backlog of applications for new generic drugs at the F.D.A. because the government does not have the money to hire enough reviewers to analyze the applications or inspectors to visit the facilities, many of them abroad. The generic drug industry tired of waiting for Congress to fully finance the F.D.A.’s generic drug office and this year proposed providing the agency with $299 million in annual fees to finance the review process.


- The Food and Drug Administration (Wikipedia)
- From Wikipedia: History of the Food and Drug Administration.
2 - The Securities and Exchange Commission is worried that energy companies are over estimating their natural gas reserves. Recent rules changes loosened the process companies used to claim how much natural gas they were able tap into. Since these affect the value of a company's stock, there is an incentive to over estimate. Some would like those rules reversed.

- The Securities and Exchange Commission (Wikipedia)
- History.

3 - Is Obama preparing midnight regulations in case he is defeated in November? These would be ways to preserve programs he has passed while in office. Somethimes these are more difficult to rescind than you might think.

4 - The Economists argues that Ameica is both over and poorly regulated:

America needs a smarter approach to regulation. First, all important rules should be subjected to cost-benefit analysis by an independent watchdog. The results should be made public before the rule is enacted. All big regulations should also come with sunset clauses, so that they expire after, say, ten years unless Congress explicitly re-authorises them.

More important, rules need to be much simpler. When regulators try to write an all-purpose instruction manual, the truly important dos and don’ts are lost in an ocean of verbiage. Far better to lay down broad goals and prescribe only what is strictly necessary to achieve them. Legislators should pass simple rules, and leave regulators to enforce them.

Judge overturns SEC ruling

2301's should take note of this story. We're covering interest groups and the related concept of agency capture. Sectors of the economy are often accused of "capturing" the regulatory agencies that oversee them by working to have people affiliated with that sector placed at the head of those agencies. The assumption is that once in power, those people will use the power of the regulatory agencies to promote the interests of the economic sector, not the general public.

The Securities and Exchange Commission is commonly accused of doing the biding of the financial sector. This story not only explains how - punishing financial companies with fines while allowing them to not admit to doing anything wrong - but how an independent judiciary can limit this practice.

Consider this to also illustrate the checks and balances and the importance of independent judiciaries. Would an elected judiciary also be able to do this?

From the Washington Post: SEC record purges at odds with other agencies

The story:

While the SEC directed its staff for years to purge certain investigative records, other agencies in the United States and abroad that enforce financial laws have instructed that similar documents be kept.

Law enforcement authorities in related lines of work have preserved records of inquiries even if those probes never led to charges against anyone. Regulators and archivists said that the records could be a valuable source of information for investigators probing other cases and could help hold the authorities accountable.

The inspector general at the Securities and Exchange Commission is investigating a long-running SEC policy that calls for purging records obtained in certain inquiries when the cases were closed. The probe was prompted by an internal whistleblower, who said the destruction of documents went on for 17 years.

The SEC has long been accused of having been captured by the financial sector. We discuss agency capture in both 2301 and 2302, along with the general topic of iron triangles and subgivernment. Current accusations concern whether the agency has purged files that might implicate it in criminal activity that might have occured that lead to the financial crisis in 2008.

- Wikipedia: The SEC.

"A regulator versus regulator dispute" SEC v FHFA

For discussion this week in 2302, some recent federal executive activity. From the Washington Post:

The Securities and Exchange Commission is moving toward charging former and current Fannie Mae and Freddie Mac executives with violations related to the financial crisis, setting up a clash with the housing regulator that oversees the companies, according to sources familiar with the matter.

The SEC, responsible for enforcing securities laws, is alleging that at least four senior executives failed to provide necessary information to investors about the companies’ mortgage holdings as the U.S. housing market collapsed.

But the agency that most closely regulates Fannie and Freddie, the Federal Housing Finance Agency, disagrees with that assessment, according to sources familiar with the matter.

FHFA officials think Fannie and Freddie’s financial disclosures, which agency staff members had reviewed before the documents were released to the public, were sufficient, the sources said. One source added that FHFA has sent a letter to the SEC opposing the filing of charges.

An FHFA spokesman declined to comment.
This is mighty complex. Essentially, one federal regulatory agency charged with investigating securities fraud wants to charge two government sponsored enterprises for activities related to the recent financial crisis, while a fourth agency that oversees those enterprises, wants to protect them from those charges. This is the latest in the housing crisis saga.

More on the story:

- David Indiviglio I.
- David Indiviglio II.
- Life after Fannie and Freddie


Here are the players:

- Securities and Exchange Commission.
- Federal Housing Finance Agency.
- Fannie Mae.
- Freddie Mac.

Wall Street, the SEC and the Justice Department

Matt Taibbi continues to expose the relationship between Wall Street, the SEC, and the Justice Department. He explores why no one went to jail for any of the fraud that was rampant for years and finds that the revolving door between Wall Street and the federal regulatory agencies protects those responsible for the abuse. The one exception, Bernie Madoff, made the mistake of bilking the wealthy. Had he stuck to simple, nameless homeowners we would have never heard of him.

Regulatory Agencies in The News

From the NYT:

The Environmental Protection Agency revoked the permit for one of the nation’s largest mountaintop-removal coal mining projects on Thursday, saying the mine would have done unacceptable damage to rivers, wildlife and communities in West Virginia. It was the first time the agency had rescinded a valid clean water permit for a coal mine.

Arch Coal’s proposed Spruce No. 1 Mine in Logan County, which would have buried miles of Appalachian streams under millions of tons of residue, has been the subject of controversy and litigation since the first application was filed more than a decade ago. Opposition intensified after the Bush administration approved the mine’s construction in 2007, issuing a permit required under the Clean Water Act.

The boldness of the E.P.A.’s action was striking at a time when the agency faces an increasingly hostile Congress and well-financed business lobbies seeking to limit its regulatory reach. Agency officials said that the coal company was welcome to resubmit a less damaging mining plan, but that law and science demanded the veto of the existing plan.

And, again, from the NYT:

The Securities and Exchange Commission has begun examining the interactions between U.S. financial firms and sovereign wealth funds and whether they may have violated bribery laws, people briefed on the matter said on Thursday.

The S.E.C. is looking into whether these institutions, including banks and private equity firms, violated the Foreign Corrupt Practices Act in their efforts to secure investments from foreign governments’ investment funds.

The S.E.C. sent out letters to several firms recently, though the agency is only in the early stages of its inquiry, these people said, speaking on condition of anonymity because the investigation is confidential. The letters asked the firms to preserve documents.

A spokesman for the S.E.C. declined to comment.

At the heart of the inquiry are the huge investments made by sovereign wealth


funds into American financial firms in recent years, many struckjust as a financial crisis began to snowball. Citigroup, Morgan Stanley and Merrill Lynch all sought capital injections from these government investment funds, raising billions of dollars in capital to shore up their balance sheets.

The Securities and Exchange Commission Sues Goldman-Sachs

The company is accused of packaging mortgage bonds they thought were likely to fail into a single portfolio, selling it to investors, and then betting against the portfolio. When the housing market collapsed, the investors lost money, but the company did very very well.

This is fraud.

More from the Huffington Post. They end their story by wondering whether the SEC will in fact punish the company. The agency looked the other way while it was going on, might it still? Has the SEC been captured by the financial industry?

For more info: Financial Regulatory Reform.