During a nomination hearing before the Senate Banking Committee on March 15, President Obama’s picks to fill vacancies on the Securities and Exchange Commission endured more than two hours of questioning that ranged from cordial to confrontational. Enforcing individual liability, ensuring cost-effective rulemaking, and the regulatory soap opera of a potential political disclosure bill were all on the agenda.

Hester Peirce, nominated to replace Republican SEC Commissioner Daniel Gallagher, is a senior research fellow at the Mercatus Center at George Mason University. Before joining the conservative think tank, she served on Senator Richard Shelby’s (R-Ala.) staff for the Senate Banking Committee.

Peirce was previously employed at the SEC, for nearly eight years, as a staff attorney and counsel to Commissioner Paul Atkins. She currently serves on the SEC’s Investor Advisory Committee and was the editor of, and a contributor to, the book “Dodd-Frank: What It Does and Why It’s Flawed,” published by Mercatus in 2012.

Fairfax, nominated to replace Democratic Commissioner Luis Aguilar, is a professor of law at George Washington University Law School, where she focuses on securities law, corporate governance matters, fiduciary obligations, board diversity, shareholder activism, and securities fraud. She authored the book, “Shareholder Democracy: A Primer on Shareholder Activism and Participation.”

Prior to joining the GW law faculty, Fairfax was a professor at the University of Maryland School of Law, and she practiced corporate law with the law firm Ropes & Gray.

Retrospective reviews

Shelby, as chairman of the committee, asked the nominees for their thoughts on the use of economic analysis in rulemaking and retrospective reviews of past rules.

In 2011, President Barack Obama institutionalized retrospective reviews with executive orders requiring agencies to regularly report on the status of those efforts.  A variety of legislative efforts (none yet achieving the status of law) have sought to expand and codify those expectations, among them the Regulatory Accountability Act and the Regulations From the Executive in Need of Scrutiny Act.

“You always want to go back and see whether rules are working as intended,” Peirce said of retrospective reviews. “One area where that is particularly called for at the moment is in equity market structure, where we have built up rules over many years and a lot of folks are asking how well they are working.”

“I don’t think you need to be concerned because I was a regulator, for eight years, and was able to do the job. The time that I spent on the staff of the SEC was very useful in teaching me the importance of regulators adhering to what Congress tells them to do.”
Hester Peirce, Senior Research Fellow, Mercatus Center, George Mason University

“Things change in the regulatory environment, and that sometimes means you will have unintended consequences,” Fairfax said. “As rules get implemented, sometimes the metrics and goals you expected do not occur. Obviously, the intent is to get things right, but looking back to see whether you did is very important.”

Tied to economic analysis is a comparison of the costs and benefits of new rules. Asked for an existing regulation where the former outweighs the latter, Peirce singled out the SEC’s conflict minerals disclosure rule, a mandate of the Dodd-Frank Act. That rule, intended as a strike against armed militias in the Democratic Republic of the Congo, requires public companies to detail their use of certain minerals from that region. “There may actually be a severe human cost to the very people that the rule was intended to help,” she said.

Peirce detailed challenges the SEC may have in conducting an adequate cost-benefit analysis. The federal Paperwork Reduction Act limits the ability of the SEC to reach out to more than nine companies. “When I was at the SEC and worked on economic analysis, we were able to call three small, three medium, and three large companies,” she said. “Needless to say that leads to some potential gaps.”

Guns & Hobby Lobby

The questioning grew more heated when Sen. Michael Rounds (R-S.D.) took issue with amicus briefs Fairfax signed onto in her capacity as a corporate governance expert.

Along with other academics in her field, Fairfax was a signatory to an amicus brief in Trinity Wall Street v. Wal-Mart, supporting the investment arm of New York City’s Trinity Church and objecting to an SEC decision that allowed Wal-Mart to block a shareholder proposal pressuring directors to reconsider whether the company should sell guns with magazines able to hold more than 10 rounds of ammunition. Walmart asked the SEC for a no-action letter, it agreed, and Trinity turned to the courts in protest.

Rounds took umbrage with allegations that the sale of firearms could “reasonably be considered by many to be offensive to the family and community values” and “damage Wal-Mart’s reputation.”


The following are from statements made on March 15 during a Senate Banking Committee hearing by Hester Peirce and Lisa Fairfax, nominees for the Securities and Exchange Commission.
Hester Peirce: My desire to serve at the SEC is motivated by the conviction that the capital markets help unlock people’s potential. Investors build their retirement nest eggs, their down payments, and their children’s college funds. Vibrant capital markets find and fund individuals and companies with brilliant ideas that can enhance people’s lives and the nation’s prosperity.
In the field of securities law, I found a natural way to combine my undergraduate degree in economics, my law degree, and my elementary school hobby of plotting stock prices. I wrote rules for investment companies and investment advisers as a staff attorney in the SEC’s Division of Investment Management. I then worked for Commissioner Paul Atkins. Following my time at the Commission, I had the honor of working for then Ranking Member Shelby on the staff of this Committee. In all of these roles, I learned the importance of carefully crafted and well-enforced laws and regulations in maintaining strong capital markets.
Lisa Fairfax: Importantly, I believe that the SEC’s three-part mission statement is more than just a statement; it is a set of guiding principles that should shape every aspect of the agency’s activities, and all three principles should work together to promote a safe and sound financial system.
With respect to capital formation, I believe the agency has a responsibility to facilitate access to needed capital for all participants in the market, from the corporation and small business owner in need of cash and credit, to the individual investing to support a family, finance a child’s education, or ensure a comfortable retirement.
All of these participants need assurances that their capital is safe and secure, which is why the agency has a reasonability to maintain a market that is orderly, efficient, and fair. Everyone needs to play by the same rules, and there must be strong enforcement for those who refuse to do so.
And of course, investors must be protected, and investors must have confidence in the markets and the financial system.
Source: U.S. Senate Committee on Banking, Housing, and Urban Affairs

He also questioned Fairfax over an amicus brief filed in Burwell v. Hobby Lobby Stores. Hobby Lobby, a closely-held chain of crafts stores, sued to escape Department of Health and Human Services rules that require employers to provide female employees with no-cost access to contraception. Its claim, validated by a 5-4 Supreme Court decision, was that the rules violated the Religious Freedom Restoration Act. Fairfax was among the experts who wrote in support of Burwell, which Rounds characterized as opposition to a business owner’s “fundamental constitutional right to free exercise of religion” and an argument that “once they form a corporation, they lose ability to make moral judgments.”

Fairfax stressed that her opinions were not a response to the underlying issues of access to either guns or birth control. “It was instead aimed at the larger corporate governance proposition about shareholder proposals and what they should look like,” she said. Shareholders in the Trinity case were “communicating their desire to have the board engage in its oversight role and engage in a process where they too were thinking about what is appropriate.”  

The Hobby Lobby brief, Fairfax said, was similarly governance-based. “The core component of a for-profit corporation is that it has a legal existence that is separate from its individual shareholders. It is why individual shareholders can change from day to day, and even minute by minute, and still have the corporation remain the same,” she said.

Watchdog or pitbull?

Fireworks continued as Sen. Elizabeth Warren questioned Peirce’s ability to serve as an advocate for investors.

“The job of an SEC commissioner is, largely, to be a watchdog and make sure the public is protected and the markets are honest and fair,” she said. Peirce’s past authorship, notably the critique of the Dodd-Frank Act she edited, fueled concerns about the nominee.

In one quoted passage, Peirce suggests that Congress should “perform major surgery” on Dodd-Frank and that the SEC “is a prime candidate for mandate trimming.” Among the “pointless mandates” are the conflict minerals and pay-ratio disclosure rules. Warren questioned whether someone should be put in charge of enforcing laws that they think are unnecessary or counterproductive.

Peirce defended her writings, explaining they were done “not in the context of a regulator, but as an academic suggesting regulatory frameworks that would work better at protecting investors.”

“I don’t think you need to be concerned because I was a regulator, for eight years, and was able to do the job,” she added. “The time that I spent on the staff of the SEC was very useful in teaching me the importance of regulators adhering to what Congress tells them to do.”

Warren was unconvinced. “An SEC commissioner has a lot of tools that can be used to undermine all of Congress’ mandates,” she said. “You can delay the rules. You can water them down. You can look the other way when it is time to enforce them. Frankly, there isn’t much Congress can do about it once you are confirmed.”

Peirce pushed back against the idea that delaying a rule is necessarily a bad idea. “When the SEC crafts rules, one of the things it does is to set implementation periods,” she said. “It does that to make sure that industry is going to be able to get on board in a way that is effective and achieves the objectives of the rule.”

“There is a big difference in disagreeing over how to best implement a law and actively sabotaging a law,” Warren retorted. “Your record gives the American people reason to be concerned about your nomination.”

Senators Chuck Schumer (D-N.Y.) and Bob Menendez (D-N.J.) suggested that they may not support either nominee based on their responses regarding rulemaking petitions that ask the SEC to require public companies to disclose political spending. The petitions have accrued more than 1.2 million public comments, an agency record, but Chairman Mary Jo White has declined to add it to the Commission’s regulatory roadmap.

Admonishing against “mushy” answers, Schumer asked: “Do you believe that shareholders of a public company have a right to know about corporate political spending and do you believe that the SEC has a responsibility to investors to require that such disclosures are made?

Fairfax said the discussion is complicated by a rider attached to Congress’ recent Omnibus spending bill that specifically puts such a rule on the backburner for at least a year. “The Commission can’t ignore mandates from Congress,” she said.

 “Sitting on the outside, I don’t know how I would vote,” she added. “I would … consider various perspectives around this issue.” Among the issues that deserve an objective review is whether these disclosures meet the materiality test for investors.

“Right now, Congress has made it clear that it should not be a priority for the SEC,” Peirce said, adding that “a corporation has the ability to spend money without checking with its shareholders every time it does.”

“Right now I would be voting against both of your nominations based on your answers,” Schumer said.

Peirce was later asked about her concerns with the current role of the Financial Industry Regulatory Authority. “What, exactly, is the organization and to whom is it accountable?” she asked. “Is it accountable to the industry? Is it accountable to the SEC? Is it accountable to investors? I think there have been concerns raised from each of those constituencies that it’s not doing a good job.”

Sen. Tom Cotton (R-Ark.) described FINRA as “in a neither fish, nor fowl mode” because it seems to have evolved beyond the traditional role of a self-regulatory organization with SEC oversight. He asked: “Do you think it needs to go in one direction or another, basically folded into the Commission or reconceived as a true SRO, perhaps in competition with other SROs as well?”

Either would be worthwhile of consideration, or “we could go the route of trying to reform FINRA and put in more accountability mechanisms to make sure the SEC is performing proper oversight,” Peirce said.