Why the Gridlock Slowing New Rules for Wall Street Won't Go Away

  • U.S. Senate weighs SEC picks who could resume partisan battles
  • Agency working on reforms for stock trading and mutual funds

The long wait by Wall Street’s top regulator for a full slate of commissioners may soon end. That doesn’t mean the partisan fights over rules and corporate punishments that have stalled action at the U.S. Securities and Exchange Commission will stop.

Democrat Lisa Fairfax, a George Washington University law professor, and Republican Hester Peirce, a senior research fellow at George Mason University, will testify before lawmakers Tuesday, almost five months after President Barack Obama nominated them to join the SEC. While Fairfax’s Senate confirmation would be a win for liberal groups that have vilified banks, Peirce has been a consistent critic of the massive regulatory expansion that’s occurred since the financial crisis.

The contrast could mean that consensus will continue to evade SEC Chair Mary Jo White, including on high-profile rules for mutual funds and stock trading that she would like to get done before the end of the Obama administration. The two SEC nominations also show that bipartisan anger toward Wall Street means people with market expertise are being passed over for top roles at financial regulators. Instead, the jobs are going to candidates with stronger political ideologies.

Mary Jo White

Photographer: Andrew Harrer/Bloomberg

“Nothing is going to change, I don’t think it eases the path at all to a highly productive agenda that this administration would like to see," said Donald Langevoort, a securities law professor at Georgetown University. “Showing a willingness for openness to different points of view has gone out of favor -- both in Congress and at the SEC -- which is scary.”

Cheese Cellar

Fairfax and Peirce’s candidacies must be approved by the Senate Banking Committee before a vote by the full Senate. Should they join the SEC, they would be among five officials who get a say on the agency’s policies and enforcement actions. The regulator hasn’t had a complete roster of commissioners in five months and has been down to three members since December.

Fairfax and Peirce didn’t respond to requests for comment, and an SEC spokeswoman declined to comment.

Last year, people familiar with the matter told Bloomberg News that the pace of rulemaking had been so slow under White that some SEC staff had nicknamed her office the cheese cellar: where policy went to age.

While White’s management was cited as contributing to the inaction, she’s also been caught in the middle between commissioners with extreme Republican and Democratic views, said the people who asked not to be named because they weren’t authorized to speak publicly.

Punishing Banks

White’s supporters argue that she has accomplished a great deal and that the agency is no more political than it has been under previous leadership. Since White became chair in 2013, the agency has brought 2,250 enforcement actions and approved 40 rules, including boosting oversight of credit rating companies.

Among the issues that have divided commissioners include whether brokers should be subject to strong conflict of interest rules that require them to put their clients’ interests first. Another key initiative is whether asset managers should be forced to stockpile more cash and easy-to-sell holdings to ensure their funds can endure periods when lots of investors try to pull their money at the same time.

A priority of White’s that has stalled is overhauling rules for U.S. stocks to address a surge in high-speed, electronic trading and the fact that transactions now take place across dozens of venues. In a June 2014 speech, she outlined a number of reforms that haven’t come to fruition.

One of the biggest SEC fights has been over enforcement, specifically whether banks accused of wrongdoing should face additional punishments that automatically get tacked on to settlements. White has often voted with Republicans to grant waivers that block the extra sanctions, drawing resentment from Democrats who say banks who repeatedly break the law don’t deserve the reprieves.

‘Foot Dragging’

White also has put off naming a chairman of the Public Company Accounting Oversight Board, a little-known body that polices the country’s largest audit firms, after Republicans and Democrats at the SEC were split on the issue.

“The PCAOB delay is a canary in a coalmine," said James Cox, a professor at Duke University School of Law. “It’s a tremendous problem that you have things like the PCAOB being undercut by the SEC dragging their feet."

Peirce would become the third commissioner who has worked on Capitol Hill, a background that some former SEC officials say has stoked political conflicts at the agency. Her former boss is Senate Banking Chairman Richard Shelby, who she helped draft a Republican alternative to the 2010 Dodd-Frank Act. As an academic, she’s written numerous articles and helped edit a book criticizing Dodd-Frank. In congressional testimony last May, she reiterated her concerns that the government has too heavy a hand in the financial industry.

Overbearing Regulators

“Strategic decisions are being made by regulators not by firms, their managers, and their shareholders,” Peirce told members of the House Financial Services Committee. “Our financial sector is turning into a set of public utilities with the characteristic high prices, poor service, lack of creativity and lack of entry.”

On the Democratic side, Obama nominated Fairfax after progressive groups and labor unions lobbied against candidates they claimed were too cozy with Wall Street, most notably Keir Gumbs, a former SEC lawyer and partner at Covington & Burling whose clients have included corporations and investors. Fairfax is favored by Senator Elizabeth Warren, the Massachusetts Democrat who is one of the finance industry’s most-reliable critics in Congress.

Fairfax has spent most of her career in academia, focusing on issues like corporate governance and investor activism. She’s also authored books and papers that called for more shareholder power in shaping corporate policies.  

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