What's Worse Than the SEC's Revolving Door?
Arthur Levitt is incensed. That doesn't happen all that often. It takes a lot to make the level-headed, even serene, former Securities and Exchange Commission chairman angry. (Full disclosure: Levitt is a director of Bloomberg LP).
What has Levitt riled up these days is the deepening politicization of the agency he ran for eight years. I spoke with several other former SEC chairs from both parties, and each expressed similar concerns. (Listen to Levitt's comments on the nomination process at the 41-50 minute mark.)
Here's the problem: How do you get qualified nominees with expertise in areas relevant to regulating capital markets and publicly traded corporate entities to fill the five seats on the commission? (Rules designate three of the five seats to the party controlling the White House.) This process has been made that much more problematic because of the objections -- many of them justified -- raised by people like Democratic Senator Elizabeth Warren, who opposes the revolving door between regulators and the regulated.
In the past, the White House would directly nominate a candidate, perhaps an academic with expertise in market structure, or an accountant or a lawyer with a background in doing work for clients in the securities industries. Such nominees obviously understood the regulatory issues in a way that few others could. But these candidates often came with a whiff of a conflict of interest: How was someone supposed to approve rules that potentially governed their former clients -- clients whom they might work for again after leaving the SEC?
But what seems to be evolving as an alternative may be no better, and is perhaps even worse. The White House, as Levitt sees it, has ceded the nomination process to the Senate, instead of finding and nominating qualified people itself.
How has this manifested itself? Three of the last four SEC nominees have been Senate staffers, the latest being Hester Peirce, a former Banking Committee lawyer. Current commissioners Kara Stein and Michael Piwowar also worked for the Banking Committee. A fourth nominee, Lisa Fairfax, is a law professor at George Washington University. She was picked after Warren objected to another nominee -- a corporate lawyer with ties to Wall Street -- due to those aforementioned revolving door concerns.
So here's how this looks. The people most likely to get confirmed by the Senate in the current partisan environment are current or former Senate staffers. Leave aside for a moment whether these candidate are the most qualified (Levitt, the longest-serving chairman in the agency's history, has his doubts). Perhaps an even bigger issue is whether this will lead to a further intensification of the kind of partisan divide that has hobbled the basic functions of our government the past decade or so.
By all accounts, it probably will. Here's why. Consider nominee Peirce, who is being named to fill the seat of departing Republican commissioner Daniel Gallagher. After leaving the Banking Committee she joined the Financial Markets Working Group at the Mercatus Center at George Mason University, where she wrote articles opposing regulations drafted after the financial crisis designed to prevent another meltdown. The Mercatus Center houses commentators and opinion writers who generally oppose regulation and advocate for free markets. Among its major backers are the Koch brothers, whose interests include not just natural resources but financial products.
So instead of having a commissioner whose independence might be open to question because of an interest in returning to the private sector, we probably will have a regulator who's opposed to reasonable regulation. And why was she picked? Maybe it's because her nomination is almost guaranteed to be confirmed by the Senate.
In a recent interview, Levitt said it's probably a mistake to nominate any candidate for a regulatory position who can't work across the aisle, compromise and get things done. He noted during his tenure as SEC chairman that almost all of the commission votes were 5-0; during the past 15 years, many votes have been split 3-2, with the wins going to the party holding the White House.
It isn't quite the paralyzing gridlock Congress is known for, but it's far from optimal, he said.
It's hard to get people interested in the dry, unsexy issue of securities regulation and market structure. It is, however, an important issue that deserves more public -- and investor -- attention.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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