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Lael Brainard

December 18, 2018

Blowing the Whistle on the SEC’s Proposed Changes

Lael Brainard: A Powerful Voice at the Fed for Main Street and Financial Stability
This past year, Federal Reserve Board Governor Lael Brainard has stood up for critical financial and consumer protections, including issuing dissents to oppose weakening the Fed’s Volcker Rule (which prohibits risky, dangerous prop trading) and on the joint rulemaking by the Fed and OCC to ease the amount of capital required at the big banks.

Brainard, who chairs the Fed’s committees on Financial Stability and Consumer and Community Affairs, has been a stalwart of Main Street consumers and the real economy and those who support it.

In addition, Brainard has been on the forefront of raising concerns about the coming downturn and the need to be better prepared, including considering the use of the counter-cyclical capital buffer. On two separate occasions, once in April and then again last week in an important speech at the Peterson Institute for International Economics, Brainard spoke on this issue – recognizing that “it might be prudent to ask large banking organizations to fortify their capital buffers.…”

Better Markets President and CEO, Dennis Kelleher, has also raised the issue of macroeconomic conditions and the need to look at systemic protections like countercyclical buffers for the coming downturn, stating back in February of 2018 that newly confirmed Chair of the Federal Reserve Jay Powell should be:

“closely questioned about the importance of counter-cyclical measures and their ideal utilization right now given the aging business cycle supercharged by historic levels of tax and fiscal stimulus (after a decade of monetary stimulus). When added to banks’ record revenue, profitability, stock buybacks and dividends, one good question might be ‘if countercyclical measures aren’t appropriate now, when would they ever be?’”

Brainard has methodically and substantively detailed the need for critical consumer and financial protections. Unfortunately, she is increasingly a lonely voice. We applaud her for the relentless and tireless efforts.

Elon Musk: A Loose Cannon That Continues to Misfire
Over the weekend, Elon Musk, CEO and former Chairman of Tesla, sat down for a 60 Minutes interview with Andrea Mitchell. During this wide-ranging interview, Mitchell asked Musk about his recent behavior that has caught many in the public off guard, including his settlement with the Securities and Exchange Commission (SEC) for a tweet sent by Musk alleging that funding had been secured for a buyout of Tesla.

Immediately after that tweet was posted, Tesla’s stock shot through the roof and was eventually halted. While the stock eventually returned to trading, it did not go unnoticed at the SEC, which promptly began an investigation and filed a hard-hitting lawsuit which, among other things, sought to bar him from being a director or executive of a public company. It appeared that the SEC was going to seriously punish Musk for a brazen and irresponsible act that clearly and directly harmed shareholders. However, the SEC and Musk quickly settled just a few days later for (1) $20 million personal fine, (2) $20 million fine for Tesla, (3) Musk being barred from holding the position of Chairman of the Board of Directors as well as being CEO for 3 years, and (4) certain corporate changes, including requiring Musk’s tweets to be reviewed before being sent.

The Chairman of the SEC, Jay Clayton, claimed that the settlement sends a message that “when companies and corporate insiders make statements, they must act responsibly, including endeavoring to ensure that statements are not false or misleading.” That, however, is a laughable claim because the SEC’s quickie settlement was less than a slap on the wrist. While $20 million might sound like a lot (and actually is a lot to 99% of Americans), it simply is not to Musk who is reportedly worth more than $23 billion. In effect, this was no punishment and no deterrent.

As we noted at the time:

“CEO and Board failures like this and worse are going to continue (if not increase because they are incentivized by rewarding it with such non-punishments), and investors are going to continue to suffer serious harm, until the SEC starts meaningfully punishing wrongdoers by substantial fines that hurt, permanent injunctions and/or cease and desist orders, lengthy bars and other stiff penalties, including the removal of grossly deficient directors.”

Musk has, predictably, proved us right: during his recent interview with 60 Minutes, he said he has “no respect for the SEC” and said no one reviews his tweets. He went on to say the “only tweets that would have to be, say, reviewed would be if a tweet had a probability of causing a movement in the stock. Otherwise, it’s ‘Hello, First Amendment’—like, freedom of speech is fundamental.”

As Matt Levine commented in a brilliant and hilarious Money Stuff column, Tesla and Musk are “not at all” complying with the terms of their settlement with the SEC (well, except maybe “technically” for a few more days).

While Musk may be an outlier in terms of his shamelessness, this pathetically weak settlement, no-review “review process” and Musk’s public ridicule of the SEC reinforces the view that the SEC cops are asleep on the Wall Street beat. The SEC’s continued failure to impose serious and meaningful punishment and deterrence guarantee more executive misconduct and more investor losses. The American people deserve better.

Blowing the Whistle on the SEC’s Proposed Changes to a Successful Whistleblower Program

Whistleblowers perform a vital public service by revealing fraudulent and illegal conduct. Now in its seventh year, the Whistleblower Program at the Securities and Exchange Commission has handed out $266 million to 55 whistleblowers who have provided the agency with critical information about fraudulent and illegal conduct, and receives about 110 requests every year for a whistleblower award. Yet despite the program’s success, the SEC is proposing changes to it that risk snatching defeat from the jaws of victory.

Before considering any changes to the program and risking that success, the SEC should remember that prior to this program being in place the agency received high-quality, specific whistleblower information on multiple occasions related to the Bernie Madoff Ponzi scheme, which occurred 10 years ago this week. In an historic dereliction of duty that harmed thousands of investors and cost tens of billions of dollars, the SEC repeatedly failed to act on that specific, concrete whistleblower information.

The Madoff scandal, whose victims are only now seeing the money they lost, was the primary motivation for Congress to enact very strong whistleblower provisions that would reward and protect meritorious whistleblowers. But what the SEC is now suggesting threatens to make this program less accessible and will disincentivize future whistleblowers from coming forward and are contrary to Congress’s intent, vision, and established direction of the program.

The proposed changes to the Whistleblower Program would arbitrarily cap whistleblower awards at the bare minimum of what is required under the Dodd-Frank Act. Whistleblowers take huge personal and professional risks reporting information and justifiably deserve to be fairly compensated.

The whistleblower program that Congress created was methodical, specific, and clear in limiting the SEC’s discretion in the implementation and execution of the program. These proposed changes put investors needlessly at risk, increases the likelihood of fraud going unreported and therefore undetected, and makes missing future Madoff-like Ponzi schemes distinctly possible.

One has to reasonably ask why would the SEC want to go back to a system that allowed a scheme to run for years that lost billions of dollars for investors, and upended and ruined hundreds, if not thousands, of lives? The SEC should embrace and strengthen the program rather than seeking unnecessary, counterproductive changes that contradict the purpose and need of the program. As we have done, we will continue to fight to prevent the SEC from making these changes.



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