New SEC head faces gridlock

Dec 2, 2012 @ 12:01 am

By Mark Schoeff Jr.

When she takes the helm of the Securities and Exchange Commission this month, Elisse Walter will simultaneously celebrate the crowning achievement of her regulatory career and confront her biggest political headache.

After Mary Schapiro departs as chairman, Ms. Walter, as one of the SEC's two remaining Demo-crats, will be saddled with a commission that is missing one member, with the remaining four split evenly between Democrats and Republicans.

How well the SEC will function under Ms. Walter, 62, is an open question, further clouding the fate of a long-delayed rule that would impose on brokers the same fiduciary standard of care for retail investment advice that investment advisers must meet.

Last week, President Barack Obama designated her SEC chairman as of Dec. 14. Ms. Schapiro's seat on the five-member commission, however, could remain vacant for a long time.


“They have essentially frozen the commission for a year,” said Peter Chepucavage, general counsel at Plexus Consulting Group LLC.

He predicts that it will take weeks or months for the Senate to confirm nominees for the permanent SEC chairmanship and for the fifth seat — a process that can be slowed by political battles.

Mr. Obama bought himself additional time by naming Ms. Walter SEC chairman, giving her more clout than if she had an “interim” or “acting” title. She can serve until late next year, when her term as a commissioner expires.

In reality, though, her powers may be limited.

“She's not a lame duck in her own capacity,” Mr. Chepucavage said. “But the commission with four members evenly divided is a lame-duck commission. They have never operated with a commission as politically divided as these four.”

"2-2 SPLIT'

Barbara Roper, director of investor protection at the Consumer Federation of America, put it in even starker terms.

“Being chairman of the SEC was an extraordinarily difficult job with a 3-2 [commission],” she said. “It looks to be impossible with a 2-2 split.”

Neither Ms. Walter nor Ms. Schapiro was available for comment.

The Dodd-Frank financial reform law gave the SEC the authority to promulgate a fiduciary-duty regulation, but it hasn't moved forward. Most observers don't expect the SEC to make much progress on a fiduciary-duty rule while Ms. Walter is in charge.

It may be possible for her to get her colleagues to agree to conduct a cost-benefit analysis on a rule's impact on the financial markets. Beyond that, expectations are low.

“Best-case scenario, you're looking at a fairly lengthy period of time before you get to a proposed rule-making,” said David Tittsworth, executive director of the Investment Adviser Association.

Ms. Walter faces an enormous challenge in implementing Dodd-Frank's mandatory rules, let alone an optional one such as fiduciary duty.

The SEC has completed just 32 of the 95 required Dodd-Frank regulations, according to an analysis by the law firm Davis Polk & Wardwell LLP.

“The question here is, how much political capital will an incoming chairman want to expend on getting two more commissioners to put out a rule proposal?” said Duane Thompson, senior policy analyst at fi360 Inc., a fiduciary training firm.

Ms. Walter has aligned herself mostly with Ms. Schapiro, the leading champion of fiduciary duty, and in a 2009 speech called for “harmonization” of the Investment Advisers Act of 1940. That law requires a fiduciary standard for advisers, while the Securities Exchange Act of 1934, which governs brokers, requires a less stringent suitability standard.

“Congress should throw both statutes on the floor, select what is best in each and cover any holes through which the floorboards show,” Ms. Walter said at the time, stressing: “Financial professionals should always act in the best interests of investors.”

For Kenneth Klabunde, vice president of City Securities Corp., that is a convincing statement.

“Her commitment to protecting the consumer is very, very strong,” he said.

“I'm in favor of a full, uniform fiduciary standard. I'm confident that's what she'll pursue,” Mr. Klabunde said.

Kirk Michie, a partner at Triton Pacific Securities LLC, said he is nervous about Ms. Walter's background at the Financial Industry Regulatory Authority Inc. and the fact that she will be following Ms. Schapiro, a former Finra chief executive.

Before becoming an SEC commissioner in 2008, Ms. Walter was senior executive vice president at Finra. Before that, she worked at the broker-dealer self-regulatory organization's predecessor, NASD. Most of her career, however, has been spent at the SEC. She served on its staff from 1977 to 1994 and has been a commission member since 2008.

“It sort of continues a progression of Finra people taking larger and larger roles in the regulatory framework of the U.S. securities industry in general,” Mr. Michie said. “It's people who don't understand the fiduciary paradigm regulating that paradigm.”

Investment advisers also are cautious of Ms. Walter's strong support for a self-regulatory organization to oversee the sector. They are hoping that she will moderate her position now that she has a new role.

Still, some in the industry are optimistic.

“Elisse has the best chance to get this group together over the next few months,” Kurt Schacht, managing director of the Chartered Financial Analyst Institute, said about Ms. Walter's ability to work with the other three SEC members. Twitter: @markschoeff


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