Post-election SEC could emphasize enforcement over rule-writing, says former chair

November 9, 2012

By Emmanuel Olaoye

WASHINGTON/NEW YORK (Thomson Reuters Accelus) – With the U.S. Congress still politically divided after the elections that returned President Barack Obama to office, the U.S. Securities and Exchange Commission is likely to take an enforcement approach to supervision rather than look to change conduct by writing new rules, former commission chair Harvey Pitt said.

A divided Congress, he said, would struggle to check an SEC that turned to enforcement actions to implement policies it saw as in keeping with the Dodd-Frank Act.

“If you’ve got a split Congress, effectively it means that Congress’s principal weapon (against a regulator) will be holding hearings … That is a lot less of a potent weapon than the notions that if Congress doesn’t like what you do, they may pass a law that curtails your ability to do what you’ve been doing.”

“In essence it enables a determined and aggressive regulator to basically move and not potentially fear being holed up by Congressional political actions. I think that’s how it will play out,” said Pitt, who heads Washington based consultancy Kalorama Partners.

Obama’s re-election was a boon to supporters of Dodd-Frank who want Wall Street firms to face tougher rules on risk taking, lending and consumer protection. Mitt Romney, his Republican opponent, had said he would repeal the ground breaking law if he was elected as president.

Since Dodd-Frank was passed in 2010, the SEC leadership has been successfully challenged by business groups and its own commissioners over its rulemaking. In July 2011, the Business Roundtable won a case against the SEC in the D.C. Court of Appeal by arguing that the agency failed to analyze the economic consequences of its proxy access rule, a rule that would have made it easier for shareholders to nominate directors on to corporate boards.

Last August, SEC Chairman Mary Schapiro admitted that she had failed to win enough support from fellow commissioners for her proposed reforms for the money-market fund industry. Schapiro’s plan would have made fund companies set aside more capital against losses, or forced them to replace the industry standard of $1 per share with a floating Net Asset Value.

With the setbacks in rulemaking, Pitt said the agency could opt to go the way of enforcement. “If the agency is attempting to be effective and to demonstrate it is pursuing issues with appropriate alacrity and diligence, enforcement enables it to move most quickly,” he said.

“If one thinks a violation of the law occurred, the path to the courts is a little easier. It helps the agency be more efficient and effective and it avoids some of the bureaucratic [obstacles] that the SEC experienced when it attempted to either adopt rules or seek legislation.”

Lee Beck, a regulatory policy analyst in Washington, said he expects the SEC to focus on writing Dodd-Frank rules in the short term. He said the agency could “take a more aggressive position” in its supervision if the commissioners change.

“Regulatory change is cumulative. While each independent regulation can be a substantial change, a Presidential re-election changes the process through long-term solidification of personnel in place and continuity of their perceptions of the regulatory process – even in independent agencies. Re-election of a President tends to create a more subtle change than election of a new President.”

The SEC will need to be careful in how it writes rules for Dodd-Frank because Republicans still control the House of Representatives, said Peter Henning, a professor at Wayne State University Law School. He said that while it was possible that the SEC could push for more enforcement actions, it is not so straightforward because a good chunk of Dodd-Frank requires the agency to write rules for the over-the-counter derivatives market.

“That may be plan B, and maybe they will go to plan B. I think they’re still going to try to write rules. And if that doesn’t work maybe then you go to enforcement.”

The future direction of the SEC depends on whether Schapiro stays on in her role as the chairman of the SEC, and the background of her replacement, Henning said. Somebody with a background in the regulatory agencies is likely to take a tougher approach to regulation than somebody who is brought in from the industry, he said.

Should Schapiro decide to leave her post, as some have speculated, it would present a golden opportunity for the President Obama to elect somebody who will bring about tougher supervision, said Dennis Kelleher, president and chief executive officer of the public advocacy group Better Markets Inc.

Pointing out that regulations have not yet been written for a fiduciary standard for broker-dealers and the Volcker rule limiting risky trading by banks, Kelleher said that appointing an aggressive chairman would send a very clear signal that the President wants financial reform to succeed.

“I think the SEC needs to be aggressive on the rules side and the enforcement side. Crime unpunished is crime undeterred and it always results in more crime. Wall Street is a high crime area so we need a talented aggressive regulator in the SEC to bring back the rule of law to Wall Street.”

(This article was produced by the Compliance Complete service of Thomson Reuters Accelus ( . Compliance Complete ( provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 230 regulators and exchanges. Follow Accelus compliance news on Twitter at: )

No comments so far

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see