Teaching Old Wall Street Watchdogs New Tricks

The SEC Chairwoman prepares to wield the power of compromise.

There is a room at the U.S. military prison at Guantánamo Bay where hunger-striking al-Qaeda suspects are strapped to chairs and force-fed through tubes in their noses. Mary Jo White is one of the few outsiders to have seen this in operation, watching as more than a dozen inmates had their meals administered to them. White went to the prison at the behest of President Barack Obama in 2009 to report on conditions there. Rather than confirm allegations of torture from human-rights groups and the U.N., she concluded that the force-feedings were humane. And what was her general impression of Gitmo? Sitting in her sprawling, light-filled office overlooking the U.S. Capitol, White sounds like a prosecutor. “It was enormously satisfying to see how well run the facility was,” she says.
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Last year, Obama gave White a new assignment: police America’s financial markets as chair of the Securities and Exchange Commission.

Since taking over the commission last April, White, 66, has given both fans of regulation and free-market types something to complain about. She has changed SEC rules to require crooked financial actors to admit guilt rather than just pay fines. She has stepped up investigations of so-called gatekeepers–the board members, lawyers and accountants who sometimes shield companies by failing to flag fraud. The SEC recently announced the latest of nearly 700 busts since White took over–a fraudulent peddler of mortgage-backed securities in Connecticut and alleged inside traders at Morgan Stanley and at a law firm in New York City–and warned big banks they’d be punished if they suppressed whistle-blowers.

But she has also lifted barriers on businesses, to the dismay of some liberals. White has told fellow members of the commission that in coming months she may, for the first time, vote with its two Republicans against its two Democrats on several important new rules … Her willingness to work both sides of the aisle on the once deeply divided commission suggests that the former prosecutor is a cannier politician than was widely expected.

As White begins her second year on the job, she faces renewed concern over the effects of high-frequency trading on the fairness and stability of America’s markets and questions about whether the SEC has been moving fast enough to respond. She is preparing new rules that will determine protections for everyday investors, affect billions of dollars in annual profits for big banks and shape the future of the U.S. financial system. At stake, White says, is America’s “confidence in the safety of its markets and the credibility not just of law enforcement but of government itself.”

The SEC was created 80 years ago in the wake of the 1929 stock-market crash to fix a key cause of Wall Street’s Depression-era dysfunction: the corporate secrecy that gave financial titans an unfair advantage over average investors. Over the decades the SEC grew from being the repository of legally binding financial reports to a powerful enforcement agency capable of levying massive fines or barring highflyers from working in the financial industry.

But as markets grew ever more complex, the SEC grew too close to the industry it regulates. Over the past 20 years, the SEC missed all sorts of gigantic frauds, like the multibillion-dollar scams run by Bernie Madoff and Allen Stanford. Unexplained market swings and unprecedented failures at major exchanges like the tech-heavy Nasdaq showed that the agency was failing to fulfill its original mission of imposing transparency and order on an increasingly complex financial system. Its Bush-era leaders included poster children for the see-no-evil oversight delivered by revolving-door regulators, and by the end of 2009, SEC enforcement seemed at times a contradiction in terms. Could the commission even keep up with financial markets?

White’s other big win came with the SEC’s passage of a key part of the 2010 Dodd-Frank reform act, the so-called Volcker rule, which was supposed to bar banks from betting taxpayer-guaranteed deposits and other assets in the markets for the institution’s own profit. After years of delay, many in Washington predicted a weak rule would emerge from the politics-clogged regulatory process. But White worked with Democratic commissioners to toughen it.

Though she has made life somewhat harder on banks, White isn’t antibusiness. She lifted an 80-year ban on small firms’ advertising to the general public for investment in their companies. In October, she pushed through a proposal to let entrepreneurs use crowdfunding to raise up to $1 million a year from lower-income investors. Both measures enraged liberals, who fear that such changes will put small investors’ nest eggs at risk. Then in November, White struck from the SEC’s agenda a measure championed by Democrats that would require corporations to disclose their political contributions. Her feel for compromise in a city that can barely remember what the word means has boosted her clout.

The only Senator to vote against White’s confirmation in committee was a Democrat, Sherrod Brown of Ohio, who said her work as a top defense lawyer for the likes of Morgan Stanley, JPMorgan and Bank of America meant she was too close to Wall Street.

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