Sour senate means Dodd-Frank can wait

Securities regulation reform in the US is set to remain on the backburner with Elisse Walter's reign at the SEC to be fraught with difficulty, at least until various political stand-offs play out.

The reason the White House has named Elisse Walter as chairman of the US Securities and Exchange Commission is obvious. She’s about the only person who can fill one of many key vacancies in the Obama administration that won’t require a distracting senate nomination.

Walter is already one of five senate-approved commissioners of the SEC, nominated by former president George W Bush. The rules state that an SEC commissioner can assume the chairman’s position of the securities regulator without having to go again before the senate.

The new chairman is the closest confidant of the outgoing Mary Schapiro. Schapiro, the first woman to ever hold the post, has been in the job since January 2009. Back then the Dow Jones was at 8000 points and the ineffectiveness of the SEC, which was evident to us all, had many questioning whether the commission should be dismantled entirely. The reputation of then outgoing chairman Christopher Cox, was utterly ruined.

Schapiro has copped a few sprays in her time from congressional figures, most famously for missing the Bernie Madoff fraud, which actually occurred under her predecessor.

Today, she’s leaving the SEC with almost universal approval. The commission has filed a record number of actions under her leadership and drastically increased the number of cases brought against US financial firms.

She’s rehabilitated the regulator’s standing and Walter has clearly been the chairman’s closest ally throughout her term. While the appointment is likely to be temporary, in the current circumstances it's an absolute no-brainer.

The outgoing SEC chairman, who flagged her departure, is joined by Secretary of State Hillary Clinton, Treasury Secretary Timothy Geithner, Secretary of Defence Leon Panetta and CIA director David Petraus as senior officials opting out of President Barack Obama’s second term – though the exit of Petraus, and certainly the circumstances surrounding his departure, came as a big surprise to say the least. The retired general, perhaps the greatest military mind of his generation and an astonishingly disciplined and resilient human being to boot, resigned from the CIA after it was revealed he had an extra-marital affair with his biographer.

The leaders of both the Democrats and the Republicans are trying to keep their troops focused on the biggest issue facing Washington, the fiscal cliff. But in recent weeks Senate Republicans have started a skirmish over the likely nomination of US Ambassador to the United Nations Susan Rice as Clinton’s replacement – the nomination hasn’t even been announced yet.

This underlines just how delicate an operation it is to get a senior official nominee through the senate. The Republicans have been thoroughly discredited on matters of foreign policy, they have no political capital to spend on the topic and the controversy surrounding Rice’s still hypothetical nomination is narrow. Yet the distracting debate continues.

The SEC chairman is responsible for implementing Dodd-Frank, something the conservatives are much more concerned about. Given the tense nature of the fiscal cliff negotiations, Obama officials know that subjecting themselves to a senate nomination process for the SEC chair when there’s an approved safe pair of hands available would be silly. However, it’s also a subtle concession that any debate about securities regulation reform will have to wait for the foreseeable future as a grand bargain to avoid the fiscal cliff is sought.

Walter, who before the SEC held senior posts at Wall Street’s self-governing body FINRA and the Commodity Futures Exchange Commission, can stay in the job until the end of 2013. At that point her five-year term would be up and she’d have to return to the senate for approval.

Another term as chairman doesn’t look very likely. The Obama administration says it will begin looking for a long-term replacement for Schapiro soon and the language employed didn’t speak to an extension for Walter.

There was a little surprise that Walter wasn’t named on an ‘interim’ basis, given that she hasn’t been on the list of likely Schapiro successors. This might be a refection of the Obama administration’s openness to another term for Walter if she performs well, or perhaps it’s a hint that their timeframe for finding a replacement will stretch the meaning of word ‘interim’.

But the reason for her immediate appointment is clear – the preservation of a good status quo. It also says a lot about how much financial regulatory reform the US can expect to achieve in the foreseeable future. It’s unlikely Walter can get a great deal done in less than a year, going by the balance of power at the SEC and the experience of her predecessor.

The securities regulator is traditionally a place where partisanship eases up a bit. The five commissioners are nominated by the president and approved by the Senate for five-year terms. One of the commissioners is the chairman and no more than three of them can be from one political party.

While that does allow a partisan majority, pushing policy implementation to the left or to the right, the senate approval process means the crazies from either side of politics are excluded immediately. Politically at least, it’s a relatively stable body.

Democratic commissioner Walter almost always voted with like-minded Schapiro, while Republicans Daniel Gallagher (sworn in late 2001) and Troy Paredes (mid 2008) provided the counterweight. Democrat Luis Aguilar (mid 2008) tended to vote with Walter and Schapiro, but not always. Hence, Walter has risen ahead of Aguilar. She was also Schapiro’s closest confidant.

However, the problem for Walter is that the Obama administration hasn’t nominated a fifth commissioner to replace Schapiro and doesn’t appear likely to do so, which means the new chairman will be dealing with a 2-2 balance not a 3-2 majority.

While she has up to a year in theory, what exactly is she expected to get done?

Schapiro herself had a tough time turning the regulator around. She started by focusing on enforcement; making sure that at the very minimum the rules at her disposal were properly applied.

This didn’t yield any big scalps, which would no doubt frustrate Schapiro, who is expected now to go into research or academia. There’s also a long 'to-do' list that falls to her confidant that will greatly change the rules the SEC will actually enforce.

The Dodd-Frank reform laws still require another 63 rule makings – from new rules governing money market funds to net asset backing declarations – each of which will be debated eight ways to Sunday.

With the SEC’s balance of power split evenly, the US is unlikely to make any significant progress on reforming its security regulatory systems, in whichever direction, until the Obama administration names a fifth commissioner, chairman or otherwise.

Alexander Liddington-Cox is Business Spectator’s North America correspondent.

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