The nomination of Mary Jo White as chairwoman of the Securities and Exchange Commission has been hailed as a signal that a tough regulator will be patrolling Wall Street. But there are also questions being raised about whether her work as a leading white-collar defense lawyer over the last decade might hamper her effectiveness.
As DealBook noted, Ms. White represented top Wall Street banks and other major companies in private practice at Debevoise & Plimpton. Recent clients included JPMorgan Chase on financial crisis cases, News Corporation over its cellphone-hacking problems, and a former Bank of America chief executive, Kenneth D. Lewis, in a civil fraud suit by the New York attorney general over the firm’s acquisition of Merrill Lynch. No doubt she had other clients who have not been revealed because their cases are not yet - or never became - public.
As the S.E.C. chairwoman, Ms. White would have a hand in every decision of importance. But the conflict-of-interest rules could force Ms. White to recuse herself from some matters. If that happens, it could raise the prospect of a 2-2 split along party lines among the other commissioners. Currently, it’s a highly polarized group, so her recusal could effectively freeze the S.E.C. from moving on an issue.
Making things more complicated, her husband, John J. White, is a partner at Cravath Swaine & Moore, a leading corporate law firm. According to his biography on the firm’s Web site, Mr. White represents a number of public companies and is deeply involved in accounting issues, a topic the S.E.C. deals with regularly. Under the law, his interests are considered to be hers.
Describing the federal conflict-of-interest rules as a minefield is probably an understatement. Like most ethics codes, they are broadly written so that most anything could plausibly come within their proscriptions. That means a claim of bias can be asserted by opponents of Ms. White who might be seeking an advantage on an issue by trying to keep her out of a decision. Those claims can be difficult to rebut and often prove to be a distraction.
The primary prohibition in the conflict-of-interest rules is a bar on involvement in a decision that will impact the government employee’s personal or close family financial interests. This would prevent Ms. White from participating in any proceeding in which her husband represented a party with a stake in the outcome. As experienced lawyers, it should not be too difficult for them to avoid this problem, although she will have to be careful to consider Cravath’s role in any matter.
Of greater concern is whether Ms. White’s impartiality co! uld be qu! estioned because of her prior representation of a client. Under a policy adopted by President Obama on his first day in office in 2009, all appointees must agree to an ethics pledge that includes the following prohibition: “I will not for a period of 2 years from the date of my appointment participate in any particular matter involving specific parties that is directly and substantially related to my former employer or former clients, including regulations and contracts.â€
The crucial term is “any particular matter,†which covers any investigation or enforcement action involving one of Ms. White’s former clients. Thus, for two years she will need to recuse herself from the decision of whether to pursue a case even if she had did not have any direct involvement in the specific matte..
Knocking Ms. White off enforcement cases may not have much of an effect in most situations. The agency’s commissioners do not get involved in dealing with a case until the investigation is nearly complete; the director of the enforcement division has the authority to authorize the issuance of subpoenas to compel records and testimony.
Most enforcement matters, particularly insider trading cases, do not generate much controversy. There have been cases that divided the commissioners, however, so her recusal could have an impact. For example, it was reported that the decision to sue Goldman Sachs for fraud in April 2010 over the sale of a synthetic credit derivative obligation was by a 3-2 vote alon! g politic! al party lines.
On the regulatory side, Ms. White will be dealing with a range of controversial issues of great importance to Wall Street, like the implementation of the Volker Rule and potential limits on high-frequency trading. This is the type of rule-making that has divided the S.E.C. commissioners in the past, and close votes occur regularly.
Ms. White’s former clients, like JPMorgan Chase, will have a significant interest in those rules, so her involvement may trigger questions about whether she should be participating in the decision. Her recusal could have a significant impact on how the rules are shaped, and whether they can even be adopted.
Unlike dealing with enforcement cases, her prior work for financial firms will not necessarily keep her from participating in rule-making about a subject involving a former client. The federal conflict-of-interest rules provide that rule-making by an agency is a matter of general pplicability, and therefore is not “any particular matter involving specific parties†that would trigger the two-year ban under the President’s ethics pledge.
Nevertheless, Ms. White will have to be careful because a rule also provides that a government employee should avoid situations in which there will be even an appearance of impropriety arising from a business or personal relationship. She can obtain clearance to deal with an issue from the S.E.C.’s Office of the Ethics Counsel, which can provide a measure of protection from criticism.
The problem with ethics issues is that they can arise at any time, and often the person does not recognize the issue until it is too late. Ms. White brings a wealth of experience to her new job, in part deftly navigating the revolving door between Wall Street and Washington. But in this new role, she’ll have to walk a fine! line, mo! re cautiously than even before.
