By Jerri-Lynn Scofield, who has worked as a securities lawyer and a derivatives trader. She now spends most of her time in Asia researching a book about textile artisans. She also writes regularly about legal, political economy, and regulatory topics for various consulting clients and publications, as well as scribbles occasional travel pieces for The National.

Mary Jo White will step down as chair of the Securities and Exchange Commission at the end of the Obama administration, leaving the agency weaker than she found it. Three of the five commissioner’s slots will then be empty, making it difficult for the SEC to transact ordinary business. This state of affairs opens the way to gridlock, since “one commissioner would have an effective veto on any regulatory decision or enforcement action,” according to the Wall Street Journal.

The SEC is limited by law to having no more than three members from any one political party, President-elect Donald Trump will have wide scope to shape the agency’s future regulatory and enforcement priorities since he can appoint three new commissioners, who share congenial views. He will also be able to name the chair, who will also have a majority of commissioners and will be able to set the agency’s agenda.

SEC as Paper Enforcement Tiger

Initially, there were great hopes that the appointment of White, a former US attorney for the southern district of New York, would restore the agency’s reputation for effectiveness. This had suffered a long-term slide, accelerating during the tenures of chairs Christopher Cox (2005-2009) and Mary Schapiro (2009-2013).

But she failed to live up to expectations, so much so that the notoriously anti-regulatory Wall Street Journal’s editorial page lauded her performance after she announced her departure:

We’ve never been fans of independent agencies, which appear nowhere in the Constitution. But Mary Jo White has been a true independent in one of history’s most ideological Administrations.

The Journal’s praise was not widely shared. in fact, advocates of more effective SEC regulation had long had White’s number. She found herself in the usual position, as Yves has written in SEC Commissioner Kara Stein Declares War on SEC Chair Mary Jo White and several subsequent posts, of being pointedly challenged by fellow SEC Commissioner Kara Stein “about SEC decisions and policies that she finds to be dubious. The word most commonly used in the media about her remarks is ‘blistering’.” And in October, Senator Elizabeth Warren called on the Obamamometer to dismiss White as SEC chair.

But the first sign that White wasn’t serious about making the SEC a feared and respected regulatory agency again came far earlier, when she appointed Andrew Ceresney, a former partner in white shoe law firm Debevoise and Plimpton, as the agency’s director of enforcement, rather than opting for someone with serious trial experience. The agency sought to trumpet the “record number of enforcements” undertaken during White’s tenure under its broken windows enforcement policy as demonstrating it had an effective enforcement presence. But quantity does not necessarily equate with quality.

Both the 2009 Dodd-Frank Wall Street Reform and Competitiveness Act and the 2002 Sarbanes-Oxley Act provided the agency with enhanced statutory authority to pursue securities law, including and internal control violations. As I’ve argued in a previous post, rather than availing itself of new and existing securities law authority to pursue serious violations, the agency opted instead to practice securities law theater, and chased high-profile but low payoff insider trading cases instead of mounting enforcement actions with wider systemic consequences (e.g. for flouting Sarbanes-Oxley internal control certification requirements and committing accounting control fraud).

In another post, I argued that the agency was quick to take a victory lap on the pathetic performance of its whistleblower program. Messaging once again trumped performance:

As with so many other parts of Dodd-Frank that required subsequent SEC action before the statute could be enforced, the agency lagged in setting up its whistleblower program, which was not launched until August 2011. This almost certainly reduced potential recoveries, in that statutes of limitation might have run before the Office of the Whistleblower was up and running and able to receive, assess, and act on whistleblower complaints. The SEC’s track record on setting up this office was actually better than its timetable to complete rulemaking on other key elements of the statute, with some rules taking years before they were effective. Now, five years after that launch, despite receiving over 14,000 whistleblower tips from individuals in all 50 states and the District of Columbia and 95 foreign countries, the SEC has thus far only made 33 awards, the top ten of which the agency has summarized. These resulted from successful enforcement actions that resulted in recoveries of more than $504 million, including more than $346 million in disgorgement and interest for harmed investors. It is impossible for an outsider to determine how zealously the SEC followed up on whistleblower tips. But given that the financial crisis alone led to economic losses of many multiples of that amount, this level of recovery seems rather low, at least to this observer, and at minimum, doesn’t seem worth crowing about.

The agency’s continued reliance on negotiated settlements– despite a public commitment to moving away from such settlements in which the targeted party neither admits or denies problematic conduct– was also disappointing, leading David Zaring to note in an opinion piece in MarketWatch “[t]hat commitment has been enforced more in the breach then in the observance.” I should mention here in passing that the agency’s poor enforcement record is just part of a wider federal failure to tackle white collar crime effectively. This dereliction– especially eschewing prosecutions of c-suite bankers– is one factor that propelled Trump to the White House.

Rule-Making Record Under White

If the enforcement record under White was lackluster, the rule-making record provides even more cause for dismay.

As Zaring summarized in MarketWatch:

The SEC didn’t pass many substantive rules during White’s tenure, couldn’t get unanimity on the rules it did pass and left the controversial regulations to other regulators. White’s agency continued to implement Dodd Frank, of course, but missed plenty of deadlines before rules required by Congress were promulgated. Its farthest-reaching initiative, the revisions to the oversight of money-market funds, was something forced upon the agency by other financial regulators, rather than something the SEC itself seemed interested in doing. Imposing fiduciary obligations on financial advisers was a matter left to the Labor Department, after the SEC curiously elected to eschew doing something about an industry over which it had an excellent claim to regulate. The agency has done nothing to oversee high-frequency trading and nothing on a potential — and much wished for by the left wing of the Democratic Party — rule on the disclosure of corporate contributions to political candidates.

Why does this matter? Well, Trump has promised to roll back Dodd-Frank. Some have questioned whether he can effectively do this: short answer, with the co-operation of a Congress in which Republicans hold majorities in both houses, he can. But his ability to unravel the entire multi-faceted Dodd-Frank regulatory program would be seriously complicated if the SEC had managed to complete rule-making procedures mandated previously by Congress, according to statutory deadlines, and had firm regulations now in place.

And in fact, it’s not out of the question that some if not many in the industry might prefer certainly, and not advocate scuttling of some regulations– particularly the more wishy-washy ones– rather than lining up wholeheartedly behind a program of wholesale regulatory rollback. In that case, the securities law regulatory framework would be in far better shape if White’s SEC had managed to meet its regulatory responsibilities, and had finished the rule-making procedures with which it had been charged, than is the current situation where serious tasks remain incomplete).

State Attorneys General to the Fore?

If Trump follows through with plans to roll back or weaken Dodd-Frank, and as expected, appoints SEC commissioners committed to a business-friendly agenda, the activities of state attorneys general will once again become more important in the securities law and financial regulatory realm.

As Reuters reports in an article entitled U.S. state securities regulators gird for action during Trump era:

“It sounds like we’re going to be under the same type of problems there were prior to the Great Recession, with securities and financial services being ‘lightly regulated,'” said William Galvin, the top securities regulator in Massachusetts. “I think that’s a problem.”

During the administration of President George W. Bush, state attorneys general used state authority to prosecute securities and financial transgressions. Notably, former New York state Attorney General Eliot Spitzer relied on authority provided by the state’s 1910 Martin Act, which predates the federal securities law, to take legal action actions against insurance firms for brokerage practices, hedge funds for improper trading practices in mutual fund shares, and investment banks for conflicts of interest that distorted the investment research they provided, to name some of the most significant initiatives. Spitzer’s successors as attorney general, current New York Governor Andrew Cuomo and current Attorney General Eric Schneiderman, have not had the impact that Spitzer had when he was lauded as the Sheriff of Wall Street.

Yet, as per Reuters again:

“Every time there has been a noticeable drop in SEC enforcement, New York prosecutors and regulators have used the Martin Act to great effect to police the securities market,” said Michael Miller, a white collar defense lawyer for Steptoe & Johnson LLP in New York.

Unfortunately, White leaves behind a weakened SEC, which Trump has pledged to weaken further. Whatever efforts state legal officers may take therefore will increase in importance. Although strong federal regulation is surely the most effective way to police financial regulation, in its absence, “the states need to do the job and should,” said Galvin.

To be sure, the powers that state legal officers can wield are much less far-reaching than those of an effective SEC or indeed, other federal regulators. But they are not negligible, as Spitzer, and more recently, the Superintendent of the New York State Department of Financial Services, Benjamin Lawsky demonstrated before he resigned in June 2015.