Mary Jo White, the SEC, and the Strategy of a Divided Commission

Mary Jo White is a partner at Debevoise.  In her confirmation related documents, she has addressed her relationship with the firm.  According to published reports, Mary Jo White has stated that she will not "participate in matters related to Debevoise or former clients for two years."

Ordinarily, this would be a minor matter.  Presumably all commissioners who join the SEC from a law firm recuse themselves for some period of time from matters that involve their law firm or former clients.  But recusal today has to be considered in the context of an increasingly divided SEC.

The Exchange Act provides that no more than three commissioners can be from the same party.  Traditionally, this means that the party of the president has three members and the minority party two members.  Its not always quite this symmetrical.  During the years of Mary Schapiro, the Commission consisted of two democrats, two republicans and one independent (Mary Schapiro).  Nonetheless, for the most part, the three two ratio remains in place.

Although there are two members of the minority party, the president has to appoint them.  As a result, there is always the possibility that the representatives of the minority party are members in name only but really reflect the views of the president.  If that is the case, one commissioner recusing him or herself on a regular basis hardly matters.

In recent years, however, the members of the minority party have been real representatives of their party, with views often in contrast to the president.  This was true under President Bush with respect to the appointees who were democrats and under President Obama with respect to the appointees who were (and are) republicans. 

While the Commission presumably approves matters for the most part unanimously there have been what appears to be an increasing number of 3-2 votes.  There are no public records with respect to enforcement proceedings (those matters are handled at meetings closed to the public) but matters sometimes leak to the press.  Moreover, with matters addressed at public meetings, divided votes seem more common. 

It is reasonable to assume that the sharp division in the Commission will continue.  This is something relevant to those subject to SEC investigations and enforcement proceedings.  Litigants before the Commission may sometimes have a rational incentive to embark on a strategy designed to disqualify a commissioner from the majority party.  To the extent the Commission had all five member, it could result in an evenly balanced Commission at the time a recommendation was considered.  To the extent the enforcement recommendation divided the Commission based upon party, the recommendation would not get a majority and, as a result, not be approved. 

All of this brings us back to Mary Jo White's two year recusal from cases involving Debevoise.  Litigants are in a position to retain the law firm and thereby eliminate one commissioner from the decision making process with respect to any enforcement recommendation.  In theory, this could result in a divided Commission.  Alternatively, it could result in a settlement strategy by the staff that is designed to assuage any concerns by the members of the minority party.  Either way it could affect the outcome of the case. 

Lets be clear.  This is not a strategy that has any certainty of success.  For one thing, the Commission may not be so sharply divided.  A recusal may make no difference.  For another. the recusal period is two years.  In at least some cases, the investigations will last longer than two years, with the recusal period having expired when the case makes it to the Commission.  Moreover, the longer she serves as chair, the shorter the remaining recusal period will be.

Its appropriate for commissioners coming from law firms to agree to a recusal period.  But in a divided Commission, it could have significant consequences.