Did Commissioner Gallagher Violate SEC Rules?

Professor Tamar Frankel is Professor of Law at Boston University School of Law. This post offers a critique of a paper by Commissioner Daniel Gallagher and Professor Joseph A. Grundfest, described on the Forum here. Additional critiques of the paper by Professor Jonathan Macey are available on the Forum here, here and here. A reply post to Professor Macey authored by Professor Grundfest and endorsed by Commissioner Gallagher is available on the Forum here.

Recently SEC Commissioner Daniel M. Gallagher issued a paper, titled Did Harvard Violate Federal Securities Law? (described on the Forum here and in a WSJ article here). The paper, co-authored with Professor Joseph Grundfest, expressed the Commissioner’s opinions regarding shareholder proposals and the Harvard Law School clinic that assisted public pension funds filing those proposals in the previous three years. The Commissioner did not mince his words. In his opinion, Harvard University and its clinic violated the securities laws by assisting proponents that failed to include references to academic studies contrary to the views of those proponents. The Commissioner was clearly presenting a threat to the University and its clinic. However, his statements also raise a number of questions about his own behavior.

To begin with, the Commissioner should have recognized that, as Professor Macey has shown in a series of posts (available on the Forum here, here, and here), his accusations are without merit and the proposals were entirely consistent with current SEC rules, policies and practices. Furthermore, in making his accusations, the Commissioner deviated from standard SEC procedures and practices.

I am unaware of any case in which a sitting SEC Commissioner released a paper accusing particular individuals or organizations of legal violations, and urging enforcement action and/or private suits against them, or used such public accusations as an instrument for urging other Commissioners or the SEC staff to change their policy. In a recent comment to the New York Times, Harvey Pitt brought up as a possible precedent a 1974 speech by then-Commissioner A.A. Sommer who expressed concerns about “going-private” transactions. However, Sommer’s speech (available on the SEC website here) did not mention (let alone accuse) any particular individuals or organizations (the only mention of any names in the Speech is in footnote citations to past court cases). There is a big difference between discussing general policy problems, which SEC Commissioners should be doing, and attacking or urging actions against particular individuals and organizations, which SEC Commissioners should not be doing.

The SEC Canon of Ethics (available here), which is binding on SEC Commissioners, warns SEC officials to be wary of using their “power to defame and destroy”. The Cannon of Ethics guides SEC officials to avoid defaming individuals or organizations. The Canon provides:

“§ 200.66 Investigations. The power to investigate carries with it the power to defame and destroy. In determining to exercise their investigatory power, members should concern themselves only with the facts known to them and the reasonable inferences from those facts. A member should never suggest, vote for, or participate in an investigation aimed at a particular individual for reasons of animus, prejudice or vindictiveness. The requirements of the particular case alone should induce the exercise of the investigatory power, and no public pronouncement of the pendency of such an investigation should be made in the absence of reasonable evidence that the law has been violated and that the public welfare demand it.”

To repeat: “[N]o public pronouncement of the pendency of such an investigation should be made in the absence of reasonable evidence that the law has been violated and that the public welfare demand it.” If Commissioner Gallagher expected the SEC and its staff to have a future investigation of the proposals the SRP assisted, the Canon of Ethics require him to avoid making public pronouncements about such a case. Of course, Commissioner Gallagher might well not expect such an investigation: Professor Grundfest has admitted that the disagreement which he and Commissioner Gallagher have, is really with the SEC and its staff, and that the SEC staff would have not found the SRP proposals deficient under its long-held policy. Therefore, Commissioner Gallagher might well have operated under the assumption that the SEC investigation and enforcement action he urged would in fact not take place. In such a case, however, issuing publicly a paper that urges enforcement action against particular individuals or organizations that the Commissioner knows or assumes would not be taking place raises questions of whether, contrary to the Canon of Ethics, the Commissioner’s actions might have been motivated by “animus, prejudice or vindictiveness” against these individuals and organizations.

These questions and concerns are exacerbated by the announcement made in a recent post (available on the Forum here) that Commissioner Gallagher’s and Professor Grundfest’s plan to publish new allegations to replace those discredited by Professor Jonathan Macey. After Professor Macey demonstrated that Commissioner Gallagher failed to notice facts that undermine the assumptions of his own analysis, a post, authored by Professor Grundfest and endorsed by Commissioner Gallagher, announced the authors’ new plan. The announced plan is to issue a revision of the authors’ paper. This revision will develop accusations of securities law violations points that the original version of the paper mentioned only in passing, and explicitly chose not to use as a basis for the original paper’s assertion of securities law violations. Commissioner Gallagher’s purpose seems to be to continue accusing the SRP proposals with new allegations that he himself chose not to make in the paper’s initial version. Engaging in this type of a public pursuit of particular individuals and organizations raises serious questions whether the Commissioner complies with the SEC’s Canon of Ethics.

Of course, the Commissioner may have a different view about fairness and ethics than is reflected in the SEC’s Canon of Ethics and standard procedures. Nonetheless, he is bound by SEC rules, including the SEC’s binding Canon of Ethics. He seems to have determined that he is not so bound. But so long as the Commissioner occupies his important governmental position, the Commissioner’s statements raise a serious question as to whether he is acting appropriately as a Commissioner and if he acted with “animus, prejudice or vindictiveness.”

Both comments and trackbacks are currently closed.


  • Subscribe or Follow

  • Cosponsored By:

  • Supported By:

  • Programs Faculty & Senior Fellows

    Lucian Bebchuk
    Alon Brav
    Robert Charles Clark
    John Coates
    Alma Cohen
    Stephen M. Davis
    Allen Ferrell
    Jesse Fried
    Oliver Hart
    Ben W. Heineman, Jr.
    Scott Hirst
    Howell Jackson
    Wei Jiang
    Reinier Kraakman
    Robert Pozen
    Mark Ramseyer
    Mark Roe
    Robert Sitkoff
    Holger Spamann
    Guhan Subramanian

  • Program on Corporate Governance Advisory Board

    William Ackman
    Peter Atkins
    Allison Bennington
    Richard Brand
    Daniel Burch
    Jesse Cohn
    Joan Conley
    Isaac Corré
    Arthur Crozier
    Ariel Deckelbaum
    Deb DeHaas
    John Finley
    Stephen Fraidin
    Byron Georgiou
    Joseph Hall
    Jason M. Halper
    Paul Hilal
    Carl Icahn
    Jack B. Jacobs
    Paula Loop
    David Millstone
    Theodore Mirvis
    Toby Myerson
    Morton Pierce
    Barry Rosenstein
    Paul Rowe
    Marc Trevino
    Adam Weinstein
    Daniel Wolf