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Wall Streetwise

29 May 2015 By Daniel Indiviglio

A Wall Street pedigree would be a plus for new U.S. watchdogs. The Securities and Exchange Commission will soon have two top vacancies, and it could use more market expertise. Nominees with financial industry ties might prompt gripes about the revolving door, but it pays to know how that world works.

Republican Commissioner Daniel Gallagher and Democratic counterpart Luis Aguilar are calling it quits, and the White House has floated the names of Keir Gumbs and Philip Khinda as replacements. Both work at law firms that represent financial institutions.

Critics like activist group Credo Action have urged President Barack Obama to pick reformers rather than Wall Street defenders. They mention Commissioner Kara Stein, a former congressional staff member who helped write the 2010 Dodd-Frank financial reform and has lambasted the SEC for waiving certain penalties for bank wrongdoing like fixing foreign exchange rates.

Stein champions transparency, clearer rules and other useful reforms. But there are good reasons to grant banks relief from technical rules that would bar them from doing business in areas unrelated to their misbehavior. The point of waivers is protection, not punishment, and depriving investors of financial services is often counterproductive. That’s been the position of SEC Chair Mary Jo White, a veteran Wall Street lawyer.

The regulator could use more commissioners who, like her, understand the practical consequences of overly aggressive enforcement. Aside from Stein, the only other one staying on is Michael Piwowar, an economist.

There’s little doubt that ex-financial honchos can be tough watchdogs. Consider former Commodity Futures Trading Commission Chairman Gary Gensler, who served as Goldman Sachs’ co-head of finance. And former SEC enforcement chief Robert Kuzami set an agency record for filing the most cases in a year but still managed to land a partnership at law firm Kirkland & Ellis.

The revolving-door issue is real, however, because of conflicts of interest. The SEC is deadlocked, for example, on an accounting fraud case against Computer Sciences. It’s an indirect conflict, but White can’t cast the deciding vote because her husband’s law firm represents the company.

That’s still a small price to pay. The SEC needs the idealism of a Kara Stein, but it could also use some Wall Streetwise commissioners.


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