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Insecurities commission

7 December 2012 By Rob Cox, Daniel Indiviglio

Gridlock isn’t just a problem in the U.S. Congress. It may also freeze up the Securities and Exchange Commission. By elevating one of five commissioners to replace departing Chairman Mary Schapiro, without naming a replacement, President Barack Obama has put the Wall Street watchdog in a bind. Political expediency may present substantial risks for investor protection.

The problem is simple math. Schapiro’s departure next week leaves the SEC’s ruling body with two commissioners from each party. To effectively govern, a fifth vote is necessary. It’s precisely why the SEC, like the Commodity Futures Trading Commission and Federal Trade Commission, was established along these lines.

That affects investors for two basic reasons. First, without a deciding fifth vote it will be virtually impossible to pass new rules overseeing financial services, such as whether additional investor safeguards should be imposed on the $2.6 trillion money markets. Democrat Luis Aguilar opposed reforms supported by Schapiro until a proper study could show whether post-crisis modifications had been effective.

The report was issued last week. For the most part, it suggests that while changes made in 2010 were helpful, they alone wouldn’t have prevented the Reserve Primary Fund from “breaking the buck” in 2008. The results might convince Aguilar to support some of the proposals embraced by Schapiro, Reuters reported on Friday. Absent a fifth vote, however, the objections of the two Republican commissioners would still sink the initiative.

Finally, there’s the recruitment problem. Though Elisse Walter was given the chairman title, news reports suggest she’s a short-term fix with her term ending in a year. That gives cold comfort to securities lawyers who might otherwise be willing to work for the SEC. Just this week, the regulator lost its general counsel, its trading and markets director and the head of the corporate finance division. Who would take a senior position at an agency whose boss is leaving soon?

The president may have avoided a confirmation battle over leadership at the SEC. But he has done no favors for investors by leaving the watchdog rudderless and, ultimately, toothless.


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