How partisan politics have poisoned the SEC

Washington's political atmosphere makes the panel too adversarial to get anything done

May 10, 2015 @ 12:01 am

By Mark Schoeff Jr.

For much of its 81-year existence, theSecurities and Exchange Commission has quietly toiled away on rules that could make only a securities lawyer's heart race. If there were disagreements among its five voting members, they were usually ironed out behind the scenes, well before a vote was taken.

But over the last decade, and especially since the beginning of the Obama presidency, that has changed. The same hardball partisan politics that has infected Capitol Hill has poisoned the SEC, slowing down its ability to adopt rules and regulations it is obligated to take up under the law and others it may choose to consider because they are in the best interests of the investing public.

“These are the political times we live in,” said Robert Plaze, a partner at Stroock & Stroock & Lavan and a former deputy director of the SEC Division of Investment Management. “The partisanship has seeped into the SEC.”


“Anytime you have chronic disagreement, it's harder to get things done,” said Duane Thompson, senior policy adviser at fi360, a fiduciary-duty training and certification firm. “It's not healthy, if there is a need to update rules and regulations where the industry has changed, and that's not possible because gridlock gets in the way.”

The SEC comprises five members — two Democrats, two Republicans and a chairman — all of whom are nominated by the incumbent president to ensure that the panel majority is from the same party that occupies the White House.

The heavy-duty partisanship is evident in recent votes on rules, where a 3-2 split often pits Republicans against Democrats. Rep. Scott Garrett, R-N.J., a member of the House Financial Services Committee, said that he has counted 10 partisan 3-2 votes during Chairwoman Mary Jo White's two years in charge.

“Unfortunately, it appears that the SEC is becoming more political and more distracted from its core mission than ever,” Mr. Garrett told Ms. White at a hearing in March.

Longtime SEC observers agree that such close votes can hurt the SEC's credibility, especially when its actions are challenged in court.

The SEC is becoming more political and more distracted from its core mission than ever.— Scott Garrett,  R-N.J.,a member of the House Financial Services Committee

For example, when the U.S. Court of Appeals for the District of Columbia Circuit vacated an SEC rule on proxy access in 2011, it noted in its opinion that “two commissioners voting against the rule faulted the commission on both theoretical and empirical grounds.” In striking down the rule, the court said the SEC had not done a proper cost-benefit analysis, an issue cited by the dissenting commissioners.

Knowing that it may lose lawsuits if rules are not airtight has contributed to the regulatory slowdown, according to Scott Kimpel, a partner at Hunton & Williams who served as counsel to former SEC member Troy Paredes.

“It has made the commission gun-shy on certain controversial rules,” he said.

One reason for the swing toward partisanship has to do with the members' previous careers. The last two appointees, Democrat Kara Stein and Republican Michael Piwowar, had been aides on the Senate Banking Committee at the same time.


Ms. Stein and Mr. Piwowar follow other recent SEC members who have come straight from Capitol Hill. They may try to check partisanship at the door when they arrive at the commission, but their previous political background helps shape their approach.

“They're not going to forget they worked for a Republican senator or a Democratic senator two weeks ago,” said former SEC chairman Richard Breeden.

Another reason has to do with the Dodd-Frank financial reform law. The controversial law was approved mostly along party lines when Congress was controlled by Democrats, and Republicans have long complained that it was shoved down their throats.

(Related read: SEC panel calls for a single database to run background checks on all financial professionals)

Mr. Piwowar and his GOP colleague on the SEC, Daniel Gallagher Jr., point to the law as the cause of the SEC's partisan fissure.

Dodd-Frank wasn't “tempered by bipartisan negotiations,” Mr. Gallagher said. “It is more prone to bring out viewpoints that divide the commission along philosophical and ideological lines.”

Mr. Piwowar agreed. “A lot of the issues we deal with are highly politicized,” he said. “It's a function of the issues and not as much a function of the personalities.”

It is more prone to bring out viewpoints that divide the commission along philosophical and ideological lines.— Daniel Gallagher,  Commissioner of the U.S. Securities and Exchange Commission

The SEC was charged with coming up with 94 rules to implement Dodd-Frank. It has taken the agency five years to finalize 60 of the rules and it still has 34 to complete, according to an analysis by the law firm Davis Polk & Wardwell.

The split among commissioners also has become an obstacle for regulations that advocates say would strengthen investor protection.

The most prominent example is the agency's continuing difficulty in advancing a rule that would impose a uniform fiduciary standard for all retail investment advice. Dodd-Frank gave the agency the authority to promulgate such a regulation, but thus far it has not done so.

Recently, Ms. White said she favors a fiduciary-duty rule but she acknowledged that its adoption would be a herculean task and that she could not guarantee that such a rule would ever be passed by the agency.

Ms. White would have to convince her fellow commission members to agree with her over an issue on which Republican lawmakers have expressed strong reservations. They question whether the costs of raising advice standards are justified by the benefits.

(Related read: Split with White House widens as Democratic lawmakers ask DOL to extend comment deadline on fiduciary rule)


Another item that has stalled is a proposal to add more filing requirements for unregistered securities, or private placements. The SEC agreed on a 3-2 vote to propose the rule almost two years ago, but it has not gone anywhere since. The two “no” votes were from Republican members — Mr. Paredes and Mr. Gallagher.

The rule was intended to protect investors after the SEC implemented a provision in the Jobs Act that lifted a ban on public advertising of private placements. Investor advocates said that extra protections were crucial so that investors would not fall prey to unscrupulous promoters.

Republican lawmakers are adamant that the proposal would undermine the congressional intent of the law, and make it more difficult for fledgling companies to raise capital.

The amendments appease liberal interest groups and improperly insert government into the private-placement process, Mr. Gallagher said.

If Ms. White advances the reforms, she could light a political fire, said Barbara Roper, director of investor protection at the Consumer Federation of America.

“There is a heavy price to be paid in terms of the nature of the response you'll get from people on the Hill,” Ms. Roper said.

While previous commission members had to deal with split votes arising out of partisan differences, they were able to find common ground and compromise more easily.

During Mr. Breeden's chairmanship from 1989 to 1993, for example, there never was a 3-2 vote. He insisted that rules be reworked until they could garner at least four approvals.

A lot of the issues we deal with are highly politicized, it's a function of the issues and not as much a function of the personalities.— Michae Piwowar,  Commissioner, SEC

“The commission's views carry a greater weight when they speak in a more unified way,” Mr. Breeden said. “When the commission adopts rules by a 3-2 vote, it undermines the sense that the commission reflects a broader national interest.”

“We did not worry about Republicans and Democrats,” he added. “I felt blessed. We could deal with every issue solely on the merits.”

A former SEC member said that current commissioners sometimes differ on policy but are not necessarily doing the bidding of their political parties.

“Every commissioner that I've had the chance to talk with has reflected some real deep understanding of issues and a concerted determination to do, in their view, what is best for investors,” said Steven M.H. Wallman, who is now chief executive of FOLIOfn Inc.

Mr. Piwowar said that he and Ms. Stein have carried to the commission the good professional relationship they formed on the Senate Banking Committee. He also said that he and Democratic member Luis Aguilar recently cooperated on a rule about small-business public offerings.

“We've worked on a number of issues behind the scenes to try to get consensus,” Mr. Piwowar said. “Sometimes we do, sometimes we don't.”

(Related read: SEC considers making use of in-house judges more transparent)


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