Wall Street Cops Reined In

When Wall Street bond dealmakers congregated in Las Vegas last week for their annual get-together, one group of folks was conspicuously absent: SEC enforcement officials.

For years now, they've been crashing the marquee event, trying, somewhat awkwardly, to mingle and make industry contacts while sniffing around for their next big case. But those plans were scuttled this year when word came down from SEC headquarters recently that there was no room in the budget for investigators to attend.

The measure is part of a series of cuts that the enforcement department — the division responsible for policing federal securities laws — is implementing as it braces for deep spending reductions in President Donald Trump's budget proposal, according to two people with knowledge of the matter. In addition to the ban on nonessential travel, the department has also imposed a hiring freeze and curbed the use of outside contractors who assist SEC lawyers with cases.

For those at the Vegas convention and more broadly across Wall Street, it's one of the strongest signs yet that the Trump era may usher in a more lenient, hands-off approach from regulators. But critics worry about fewer cops on the beat.

“We're already seeing a quieter enforcement regime” since the change of administration, said Urska Velikonja, a law professor at Emory University in Atlanta, who has studied the regulator's enforcement history. “The number of enforcement cases is likely to be down considerably going forward.”

Chris Carofine, a spokesman for the SEC's acting chairman, Michael Piwowar, denied that he had directed any agency division to make budget cuts or curtail spending. But last week Piwowar said that the SEC should review how it allocates resources, particularly because the agency's funding might be cut.

“Depending on which way the budget goes and stuff in the future, we're going to have to make some tough choices in terms of using limited resources,” he said at a conference in Washington for investment advisers.

Trump's nominee to lead the SEC, Wall Street lawyer Jay Clayton, is making progress toward winning Senate approval. The U.S. Office of Government Ethics is close to signing off on his financial disclosure form and an ethics agreement involving conflicts of interests, a person with knowledge of the matter said March 3.

Judy Burns, an SEC spokeswoman, declined to comment, as did a White House spokeswoman.

New Chairman

Morale in the investigatory unit, the SEC's largest with almost 1,400 full-time employees, has fallen since Mary Jo White, a former U.S. attorney who fiercely advocated for the division, stepped down as SEC chairwoman in January. Some staff members are dusting off resumes and calling former colleagues who moved to private practices for tips on how to swing through the revolving door.

While White wanted more enforcement powers, Piwowar has questioned some of the agency's cases. The former professor has argued that penalties sometimes harm investors who were innocent victims of wrongdoing. He's already reined in the division by allowing only the enforcement chief to authorize formal investigations, slowing down probes by a few weeks, according to people familiar with the situation.

The new environment marks a dramatic change from that under former President Barack Obama. After being blamed for missing Bernard Madoff's Ponzi scheme and Wall Street abuses that led to the financial crisis, the SEC persuaded lawmakers that it needed additional resources to adequately police markets. Its annual funding nearly doubled, to $1.6 billion for fiscal 2016, from 2008 levels, according to SEC budget reports.

The enforcement division accounted for $513 million of 2016 spending. The regulator also reorganized its enforcement division with specialized units, including one that focused on securitized debt.

In recent years, SEC officials used the Las Vegas conference to hold closed-door discussions with groups of investors from companies such as Vanguard Group Inc. and BlackRock Inc. The goal: to convince firms to share information with regulators, particularly when practices strike them as inappropriate.

The conference, sponsored by the Structured Finance Industry Group, gained notoriety after Michael Lewis's “The Big Short” told how short seller Steve Eisman crashed the event just before the credit crisis hit.

With the market booming once again for debt backed by everything from cars to mortgages, a record crowd showed up for the meeting this year — more than 6,500 people. None were from SEC enforcement, a list of attendees shows.

Bloomberg News

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