Senate Republicans prod SEC nominees on costs of Dodd-Frank

The leading Senate Republican on financial issues won’t block the confirmation of two Securities and Exchange Commission nominees, even as he will continue to push the agency to conduct economic analyses of financial regulations — a demand that is slowing down the implementation of the Dodd-Frank reform law.
Sen. Richard Shelby, R-Ala., ranking Republican on the Senate Banking Committee, indicated on Tuesday that he supports SEC Commissioner Luis Aguilar, a Democrat who is being renominated, and Daniel Gallagher Jr., a Republican tapped to replace Commissioner Kathleen Casey.
“I hope we can expedite their confirmation,” he said of the nominees appearing today before the banking panel.
The nominations stalled momentarily on Tuesday, as Sen. David Vitter, R-La., put a hold on a confirmation vote. He released the hold on Wednesday, when the SEC announced that thousands of investors who lost money in the R. Allen Standford Ponzi scheme are entitled to compensation from the Securities Investor Protection Corp. Mr. Vitter has many constituents who were victims of the Mr. Standford’s rip off.
It now appears that Mr. Aguilar and Mr. Gallagher have a clear path to confirmation, although any senator could place a hold on them at any time. But there’s no sign of a concerted effort to hold back the nominations by the GOP Senate caucus.
By contrast, Republican senators have warned that they will filibuster anyone the Obama administration nominates to be director of the Consumer Financial Protection Bureau, unless Congress changes how the agency would operate.
Sen. Tim Johnson, D-S.D., chairman of the committee, did not indicate when the panel might vote on the SEC and SIPC nominees.
“We need strong leadership at all our financial regulators, and I am glad the president has sent us four well-qualified individuals to fill these openings,” Mr. Johnson said. “I hope the Senate can consider their nominations in a timely manner.”

Mr. Shelby used the hearing to admonish the SEC to conduct cost-benefit analyses of the approximately 100 regulations that it must write under Dodd-Frank. He argued that the regulatory burden would undermine U.S. financial companies, cripple job creation and hurt an economy trying to find its legs after a devastating recession.

House and Senate Republicans have called on the SEC not to move forward with a universal fiduciary duty until it does more work on determining how making broker-dealers adhere to a more stringent standard of care would affect the investment advice market.

The SEC issued a staff report to Congress in January recommending that the agency promulgate a fiduciary duty rule to better protect investors, who it said are confused by the differing standards that investment advisers and broker dealers must meet.

Ms. Casey and Troy Paredes, the two Republican SEC commissioners, issued a dissent to the report, saying that it failed to offer sufficient economic analysis for its recommendation. It appears that Mr. Gallagher, a partner at Wilmer Hale and former co-acting director of the SEC Division of Trading and Markets, will pick up where Ms. Casey left off.

“It is critically important that the SEC get the rulemakings right,” Mr. Gallagher said in response to a question from Mr. Shelby. “Getting it right means also properly weighing the costs and benefits of the rulemaking. It’s impossible to say you got the rule making right when the costs outweigh the benefits.”

Mr. Gallagher also cautioned that a lack of appropriate cost-benefit calculations makes SEC regulations vulnerable to court challenges.

Mr. Aguilar tried to assure the committee that economic analysis is part of the SEC process for adopting rules.

“It’s important to weigh as best we can the balance between the costs and benefits,” Mr. Aguilar said.

Democratic critics assert that Republicans are using the economic analysis issue to derail Dodd-Frank implementation.

Sen. Robert Menendez, D-N.J., said that a broad view must be taken when looking at regulatory costs and benefits. Not moving forward with new rules could lead to another financial crisis, he said.

“If [market protection] fails, we’re on the hook for trillions of dollars,” Mr. Menendez said. “There’s a difference between a free market and a free-for-all market.”

As often happens in hearings, each party asks questions that elicit answers that support their policy positions. Mr. Johnson gave Mr. Aguilar a chance to say that the SEC needs more money to conduct its normal market monitoring and investor protection duties while implementing Dodd-Frank.

In response, Mr. Aguilar said that the SEC has had funding problems for “more than a decade” and is just now returning to the staff level it achieved five years ago.

“We probably need a more robust budget,” he said.

One senator also expressed what is becoming a bipartisan concern about a separate fiduciary duty rule being considered by the Labor Department. The regulation would expand the definition of fiduciary requirements for advisers working with retirement plans.

Sen. Kay Hagan, D-N.C., pressed Mr. Aguilar on whether the agencies are coordinating their fiduciary efforts, a matter that she said has “wide-ranging implications for securities markets.”

Mr. Aguilar said that he would have to follow up with Ms. Hagan after the hearing.

“I have not been briefed by the staff as to the nature of those discussions,” Mr. Aguilar said.