Doesn't Scare Anybody

Mary Jo White Doesn't Scare Anybody Obama's SEC chief has whiffed on regulating corporations

BY ALEC MACGILLIS

Last year, when President Obama named Mary Jo White as his pick to chair the Securities and Exchange Commission, he cast the nomination as a shot across the bow of Wall Street wrong-doers. “It’s not enough to change the law,” he said. “We also need cops on the beat to enforce the law.”

The line was a reference to White’s decade-long stint as the U.S. Attorney for the Southern District of New York. In that job, she was known for unflinching prosecutions of, among other high-profile defendants, mobster John Gotti and the perpetrators of the 1993 World Trade Center bombing. And, indeed, since moving from prosecutor to regulator, White has sought more admissions of wrongdoing in the agency’s settlements of financial misconduct cases than did Obama’s first SEC chair, Mary Schapiro. In last year’s case of a money manager who improperly borrowed $113 million from a hedge fund to pay his personal taxes, White rejected the settlement negotiated by SEC staff because it did not include an admission of wrongdoing, which the commission later obtained.

Which is why it might seem strange that, one year into White’s tenure in one of the government’s most important regulatory posts, many of those on Wall Street and in corporate corner offices are breathing a sigh of relief. It turns out that being a tough enforcer of the rules is different from being a hard-minded conceiver of the rules—especially when it comes to bringing more transparency and accountability to corporate management, something that may be as important as wringing convictions from bad guys.

At a time when the country could sorely use big-picture reforms in corporate law, White is largely taking a pass.

The differences between being an aggressive prosecutor and being a vigilant watchdog are most conspicuously on display around the issue of political money. Thanks to the Supreme Court, vast amounts of “dark money” now flow from corporate coffers into elections and Washington.


The Justices made the practice largely legal, which removes White’s old law-enforcement colleagues from the picture. Regulators, however, are more needed than ever: The Supreme Court itself has urged disclosure of the greater corporate spending it made possible in the 2010 Citizens United v. Federal Election Commission ruling; one rationale for lifting overall limits on direct contributions to candidates, as it did in this year’s McCutcheon ruling, is that these donations are at least made public. Who could assert the authority to ensure that disclosure happens? The SEC.

But it turns out that a key obstacle in the way of greater transparency for political spending is SEC indifference. White has almost prided herself on her languor on this front, casting it as a noble refusal to allow herself to be cowed by those seeking “political change” via the SEC. The upshot is that one of our most important public actors, an agency that played a pivotal role in achieving reforms in an earlier dark-money era, has left the field of play.

At the center of reformers’ disappointment with White is her decision, late last year, to drop from the SEC’s regulatory agenda consideration of a rule requiring corporations to disclose their spending in the political sphere—on Washington trade associations, 527 groups, and the 501(c)(4) “social welfare” organizations, like Karl Rove’s Crossroads GPS, that have become the favorite channel of dark money. After Citizens United, a group of 10 law professors, not all of the liberal persuasion, submitted a petition urging the SEC to require disclosure of political spending; the petition garnered 600,000 mostly favorable comments from the public, a record response.

The proponents’ argument was framed as one of shareholder rights: with corporations newly liberated to spend large undisclosed sums on politics, shareholders had a right to know how their money was being spent. At least some of the research on the question suggests that corporations disclosing political spending perform better; there is no shortage of recent examples of companies like Enron or WorldCom, whose funneling of big money to Washington served as a warning sign about dubious business practices. More than 100 corporations have already agreed voluntarily to disclose at least some of their political spending, but an SEC rule would level the playing field and guarantee accountability and transparency across the board, at least among public companies. In 2012, Schapiro agreed to put the proposal on the agenda—though the wording made it clear that her staff was only to start studying whether to consider such a rule, not actually draft it.

Still, that was enough to set off a fierce Republican backlash—the Wall Street Journal editorial page fulminated against the proposal, and the House Oversight and Government Reform Committee, chaired by California Republican Darrell Issa, demanded the SEC turn over staff emails regarding the proposal. This, in turn, led to a remarkable and largely overlooked nine-page memo from Issa’s committee last July. The document alleged that Schapiro had agreed to add the disclosure rule to the agenda, against the misgivings of her staff, only as a result of pressure from Barney Frank and liberal groups like Public Citizen. “The inexplicable attention to political spending by tax-exempt organizations suggests that pressure from the House Democratic Leadership and special interest groups successfully influenced staff consideration of the issue,” the memo states. It goes on to connect the proposed rule to revelations that the IRS had given close scrutiny to Tea Party groups seeking tax-exempt status, decrying both as part of a “government-wide effort to stifle political speech.”

Frank scoffed when I asked him recently about the Issa memo. (He scoffed even at my calling it the “Issa memo,” saying it was surely written by staff, not the chairman himself, since Issa is “semi-literate.”) “For Darrell Issa of all people to suggest something inappropriate with a member of Congress pressuring an administrative agency to do things is as bizarre as it gets,” Frank said, noting that he was pushing to greatly increase the SEC’s budget even in the period when Schapiro was resisting the disclosure proposal. A spokeswoman for Issa, Becca Watkins, said he stood by the memo: “Our memo was a result of documentation and internal emails that showed the concern from the SEC that came out of professional staff,” she said.

For all the Sturm und Drang, little progress had been made on the proposal by the time Schapiro stepped down at the end of 2012. And when it came time for White’s confirmation as her replacement, Republican fury had not abated. Pressed on whether she would stick with the idea, White was noncommittal. But in November, she quietly dropped it from the agenda, with an SEC spokesman suggesting the agency had too much else on its plate, notably the rulemaking for the Dodd-Frank financial reform law.

The proposal’s supporters are still smarting from her decision. They scoff at the claim by some SEC officials that the issue should be left to the FEC and IRS, noting that the former is utterly dysfunctional and the latter is hamstrung by the investigations into its handling of Tea Party groups. “I was very disappointed,” says Frank.
“I cannot think of a single reason why corporate executives ought to be able to spend shareholder money for political purposes and keep it secret.” Kent Greenfield, a Boston College law professor, calls corporate disclosure the “obvious response” to Citizens United. “Even if corporations are citizens, which is what Justice [Anthony] Kennedy said they were, the mother’s milk of corporate accountability when it comes to money as speech has to be information,” he said. “Most political spending [by corporations] is essentially self-dealing by executives, and if you have hundreds of millions of dollars of self-dealing by executives, it’s squarely in the SEC’s purview to do something about it.”


These days, White’s regulatory approach is drawing acclaim from an unlikely group: Republicans. Idaho Senator Mike Crapo, the senior Republican on the Banking Committee, praised her “flexibility” in an interview with Time. GOP SEC commissioner Daniel Gallagher, an ardent opponent of requiring disclosure of corporate political spending, says of White: “It’s bringing people into the process that she’s got a special knack for."

An SEC spokeswoman said the agency declined to comment on White’s decision on political spending disclosure. But in a lecture last October at Fordham University, White offered what sounded like an implicit explanation for her resistance to the political-spending disclosure proposal as she expounded on the need for the SEC to maintain its “independence.” “That independence—and the agency’s unique expertise—should be…respected by those who seek to effectuate social policy or political change through the SEC’s powers of mandatory disclosure,” she said.

This line deeply grates White’s critics, who say she is using “independence” as an excuse to absent the SEC from important matters of public policy. Yes, the SEC must maintain its integrity as a regulatory agency, they say, but it is in its own way an inherently political body, with a majority appointed by the party in the White House and with a purview that reaches across a large swath of American business and commerce. White’s conception of the SEC’s role, says Greenfield, is “a very limited and skewed way of looking at what’s at stake.”

White’s critics offer two related theories for her decision to drop the disclosure proposal. One is that the pressure from Issa and other Republicans had a real effect—after all, it’s quite possible that the GOP will control Congress next year and thus have a big say over her agency’s budget. White has sided with the Republicans on the commission on other issues, including pressing forward with loosening rules governing small stock offerings as called for in the deregulatory JOBS act passed in 2012, which critics say she has prioritized over Dodd-Frank (though she did side with the commission’s Democrats in strengthening the so-called Volcker rule on propriety trading, a key part of Dodd-Frank.)

The other theory is that the decision on the political disclosure rule reflects her close ties to the corporate law community. Following her decade as U.S. Attorney, White spent 10 years as chair of the litigation department at the elite firm of Debevoise & Plimpton, where she was pulling down $2.4 million per year before returning to the government. She named as her chief of staff a veteran of another big New York firm, Shearman & Sterling. (Her husband, a former head of the SEC’s division of corporation finance, is a senior partner at Cravath, Swaine & Moore.*)

And White is irritating liberal critics in areas other than transparency, too. Critics point to signs in her strategic plan for the agency that suggest White is inclined more toward her former colleagues in corporate law than to advocates for shareholder rights. The strategic plan includes proposals to rein in activist investors and to proxy advisory services, two nemeses of corporate management. “It turns out ‘independence’ means independent from liberals, and total dependence on the corporate law community,” says Columbia law professor Rob Jackson, one of the 10 signatories of the original petition.

Jackson compares White unfavorably in this regard even to Chris Cox, SEC chair under George W. Bush, who despite other failings did push for some investor-friendly measures regarding executive compensation and proxy access. “Tell me one thing that [White's] board has done that’s investor friendly—I can’t think of one,” says Jackson. “It’s astonishing. And the reason it’s been missed is that she’s established this notion that she’s going to be the top cop on the beat. That disguises the fact that she’s the most investor-unfriendly chair in two decades.”

One contrast is particularly instructive. Four decades ago, the SEC reckoned with Watergate, when it emerged that the Nixon White House had essentially been shaking down companies for secret campaign contributions under threat of IRS audits or other unwelcome outcomes. Under the leadership of legendary SEC enforcement chief Stanley Sporkin, the agency undertook its in-depth “questionable payments” investigation, which uncovered corporate slush funds used not only for political contributions but illegal commercial endeavors abroad. The revelations led to the passage of the Foreign Corrupt Practices Act of 1977.

Today, the dark money is flowing strong again. Once again, corporations approached for money by groups like Crossroads GPS have to worry about what will happen if they say no—what if they don’t give but their competitor does, and word gets back to the elected officials who will hold sway in some future dispute between the two companies? Since the money is undisclosed, the company has no way of even knowing if the rival has given, putting all the more pressure on it to do so. It may not be long before some other case of tawdry commingling of political and business interests damages shareholders and embarrasses the country—not to mention the regulators who could have prevented it.

*Correction: This piece initially stated that Mary Jo White's husband had been a partner at Cravath, Swaine & Moore for 25 years. He in fact still remains a partner there.