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The predictions of Mary Jo White

To celebrate our 150th issue, pfm sat down with Mary Jo White to hear her views on the regulatory world. Nearly a year on from the interview, Claire Wilson looks at which of the former SEC chairwoman’s forecasts have proved accurate

In the early days of his presidency, Donald Trump repeatedly vowed to “do a big number on Dodd-Frank” and said excessive regulation was “killing jobs” and “driving companies out of America.”

His actions appeared to speak louder than his words; he signed an executive order ordering a review of the Act, and a second directing every federal agency to establish a task force to ensure each has a team to research all regulations and take aim at those deemed burdensome to the economy. His appointment of former private equity lawyer Jay Clayton to head up the SEC to many sounded the death knell of the regulatory status quo.

But ex-SEC chairwoman Mary Jo White wasn’t among them. White left the Securities and Exchange Commission in January to take up a post at the law firm Debevoise. Earlier this year, to commemorate our 150th edition, pfm sat down with her to discuss achievements during her four-year tenure at the agency’s helm, and expectations from the new administration. At the time, she told pfm that a change in president will not result in a change at the agency. Almost a year after the interview, we take a look back at some of her predictions, and see whether or not they have materialised.

The SEC will remain strong

“You might see some differences conceivably in this administration, but I think for the most part enforcement is a bipartisan issue and the SEC will remain strong,” White said.

This has certainly been the case. The agency has continued its private funds examination program apace. Frontline staff are as active as ever, and in the seven weeks to early October “a flurry of exams” were launched, delegates at sister title Private Equity International’s Private Fund Finance and Compliance Forum in San Francisco were told during a panel discussion on current SEC exam priorities.

One notable change has been seen in enforcement action, or more accurately the lack of it. Far fewer exams have led to fines or industry suspensions in 2017 to-date than in previous years. While there are a number that are yet to go public, there has been a “significant slowdown,” the lawyer said.

This could be because there are currently two empty seats on the commission, meaning it’s more difficult to get the required majority vote on whether enforcement action should be taken, because of the more conservative top brass at the top of the agency, or because of a perceived improvement in industry practice.

Fees and expenses will remain a priority

“In terms of the industry’s changes in practices, policies and procedures in these areas, that’s ongoing, although I think lots of progress has been made there,” White said, adding that while they will continue to be scrutinized, problems should be fewer.

Fees and expenses remain under the spotlight and the regulatory lawyer speaking during the panel discussion said around 80 percent of the feedback firms receive following an examination relates to this area. The agency is focused on whether they are fully disclosed, and whether they are allocated correctly.

A pair of fee-related cases concluded in August. In the first, a firm paid $1.6 million in fines and client reimbursement for misallocating expenses to its fund. The SEC alleged the firm unlawfully charged legal, hiring and employee consulting expenses to the fund, and interpreted the firm’s policy to only permit “normal operating expenses.” In the second, a longstanding fund was fined after the agency alleged it double-dipped advisory fees by moving assets into a reserve fund it built so it could distribute consistent returns.

Other topics of interest are conflicts of interest, political contributions and marketing material compliance, “the standard checklist,” according to a CFO that was on the panel.

Two firms were fined over conflicts of interest in July. The SEC alleged that undisclosed conflicts inherent in Ohio-based Resilience Capital Partners’ structure enabled management to take unauthorized loans from three private equity funds. In the second case, real estate firm Paramount Group was fined in relation to claims it failed to reimburse agreed costs following an asset sale from one of its funds to another.

Cybersecurity will remain a top issue

“I think the biggest systemic risk to the financial system is cybersecurity. No one’s immune from these risks and the fallout from them if they come to pass,” White told pfm, reiterating a point she made during a speech given at the May 2016 Investment Company Institute conference.

Through the SEC exams, White said she found some private fund managers were further ahead in addressing cybersecurity than others, and that has remained the case. In the agency’s most recent sweep, the results of which were published in August, most firms were found to have written cybersecurity policies and procedures in place and nearly all conducted periodic risk assessments. But shortcomings remain and the SEC found that some policies were not tailored to the specifics of the firm, others were not reviewed annually where required and, at a systems level, several firms were using outdated operating systems.

Despite the apparent shortcomings, there has been no published enforcement action taken against private fund firms for cybersecurity rule breaches.

In an ironic turn of events, the agency has itself been a victim of a cyberattack in the past 12 months. Hackers were able to access its company filings system EDGAR and traded profitably on the information, prompting Clayton to issue a fresh warning to firms of the importance of ensuring a robust cybersecurity policy is in place. 