With an eye toward filling vacant seats that have extended through two presidential administrations, nominees for the Securities and Exchange Commission went before the Senate Banking Committee on Oct. 24.
The Committee interviewed Robert Jackson, Jr., and Hester Peirce, President Trump's nominees to fill open seats on the Securities and Exchange Commission.
Jackson is nominated for the remainder of a five-year term expiring June 5, 2019. He is a professor at Columbia Law School and director of its program on corporate law and policy. His academic work focuses on corporate governance and improving transparency in securities markets.
Jackson has served as a senior adviser at the Department of the Treasury during the Financial Crisis, assisting Kenneth Feinberg in his work as special master for TARP executive compensation. Prior to that, he worked as a lawyer in private practice.
He may be best known to SEC watchers as one of the professors who spearheaded a campaign and petition for rulemaking for seeking the disclosure of political contributions by public companies.
Peirce would serve for the remainder of a five-year term expiring June 5, 2020. She is a senior research fellow at the Financial Markets Working Group at the Mercatus Center at George Mason University. Previously, she served on the staff of the Senate Banking Committee and as a staff attorney with the SEC from 2000 to 2008.
She is the editor and a contributor to the 2012 book, Dodd-Frank: What It Does and Why It’s Flawed. The book concludes that Dodd-Frank "not only fails to achieve many of its stated goals, it also creates dangerous regulatory pathologies that could lay the groundwork for the next crisis."
Peirce was an unconfirmed nominee to fill the same post by President Obama back in October 2015. Neither she, nor fellow nominee Lisa Fairfax—a Democrat and law professor at the George Washington University Law School—garnered the full and necessary support of Senate Democrats.
As the role of the SEC has becoming increasingly political in nature, a tradition has evolved in which nominees for open seats come from opposing political parties, so that no one political party dominates the Commission.
“It is incumbent on the SEC to lay out clear rules, enforce them diligently and impartially, and modernize them when necessary,” Peirce said in her opening remarks. “If regulation is appropriately flexible, innovation can bring new investors into the financial markets, lower prices, and improve the quality of financial products and services.”
“Innovation forces existing companies to stay on their toes and pushes them aside when they fail to meet people’s needs,” she added. “A regulatory system that invites competition ensures that the capital markets work for Main Street.”
“Protecting America’s investors is at the heart of what the SEC does,” Jackson said with his opening salvo. “Safe markets encourage investment, entrepreneurship, and growth.”
“At the Treasury Department during the Financial Crisis, I was proud to help develop rules that tie top managers’ pay more closely to performance and give investors a voice on executive compensation,” he added. “When my research team at Columbia Law School showed that the SEC’s systems were inadvertently giving high-speed traders market-moving information before the public could see it on the SEC’s Website, I worked with this committee’s staff to help make sure the SEC gave investors the level playing field they deserve.”
Jackson said he would be “a strong advocate for exploring how new technologies can make corporate disclosures more reliable and enforcement efforts more effective and efficient.”
Asked where, ideally, the nominees would focus their efforts, Peirce cited the oversight of financial firms by the Commission’s Office of Compliance Inspections and Examinations, oversight of self-regulatory organizations (notably the Financial Industry Regulatory Authority), and “taking another look at market structure” with a focus on the fixed income market.
Jackson singled out cyber-security. “Recent events at both the SEC and public companies have taught us that we have some work to do,” he said.
“I am worried that too often we are just seeing settlements, costing shareholders money, to take the focus off the executives.I will commit to looking at individuals."
SEC Nominee Hester Peirce
“Completion of outstanding rules that the Dodd-Frank Act required” back in 2010 was another of Jackson’s stated priorities. Investor protections, executive compensation clawbacks, insider trading, and enforcement efforts were addendums to his list.
“I worry that recent events have caused investors to wonder whether or not the SEC is really on top of the job and the cop on the beat we need to make sure investors are getting a fair deal,” he said.
FINRA: Sen. Mike Rounds (R-S.D.) solicited the nominee’s views on FINRA, the self-regulatory organization, overseen by the SEC, that monitors brokers and broker-dealers.
“I believe there is room for improvement, in particular with issues related to transparency,” Rounds said. “FINRA, in my opinion, must also do a better job in giving producers an outlet to air their concerns.”
Peirce said she was encouraged by new leadership at FINRA and by its subsequent outreach to various constituencies.
“I worry about transparency too, and I have heard concerns from small firms about their ability to be heard by FINRA,” she said, expressing concern that the “regulatory burden is not properly calibrated” based on firm size.
Firms, she said, face a culture, fostered by FINRA, to just “keep your head down and do your thing.” They are subsequently “unwilling to raise issues, even when they see real fraud happening.”
Jackson similarly assured senators that the SEC, with him on board, would “take a prominent oversight role with FINRA.”
“One thing FINRA is doing is collecting important information and data on the degree that brokers are engaged on fraud,” he said. “There are a number of repeat offenders in that space, and I am not sure FINRA has been transparent enough in terms of giving that information to investors so they can tell the difference between the producer who can help them plan for their retirement and someone who's going to take their money.”
Fiduciary rule: Rounds called the Department of Labor’s controversial “fiduciary rule” for financial firms and advisers offering retirement-related investment advice “fundamentally flawed.” Echoing the view of many critics of the requirements enacted in the final days of the Obama Administration, he said it “should have been done at the SEC.”
“The SEC should have an important role in the development of these fiduciary standards,” Jackson said. “It is a natural area for the Commission to do rulemaking. I understand that, presently, [Chairman Jay Clayton] is working with the Department of Labor and other regulators to develop the SEC’s presence.”
“What’s important in developing this standard is to make sure that the market and investors have consistency,” he added. “My concern is that one day investors are going to think they have one standard of protection for their retirement assets and another standard of protection for their brokerage accounts. That kind of confusion is not only costly, but doesn’t let investors know about the protections they are supposed to have.”
Peirce said she has “concerns about the rule as it is currently written.”
“I’m glad that calmer minds have prevailed and people both at the Department of Labor and at the SEC are taking a look at it,” she said. “It is also important to work with the states and try to bring everybody in to work together.”
Cyber-security: Amid reports that the SEC’s EDGAR system was breached in 2016, and with plans for massive, real-time data collection with its Consolidated Audit Trail afoot, cyber-security was a recurring concern of senators.
“Anytime the SEC is collecting data, I think it needs to ask, ‘Do we need the data? What are we going to use it for? And can we protect it?’ ” Peirce said. “I’m not convinced that those questions have been answered to my satisfaction.”
Companies are “spending billions of dollars on the latest technology and, for the SEC to keep up, they need the resources,” Jackson said, lamenting budget and appropriations concerns.
Concerns were also raised about post-breach public disclosures and the materiality threshold that governs them.
“My concern is that the SEC’s rules in this area, and guidance on what is material, are not keeping pace with the changes in our markets and our companies,” Jackson said. “It is very easy to be at an agency like this one and talk about, and think about, these problems in very technical ways. What should the 8K rules look like? What is the right market structure for us? What I hope to be able to do as a commissioner is to keep in mind why you do it: to protect investors.”
Individual accountability: A recurring question, from both Democrats and Republicans on the senate committee: Will the SEC in the future do a better job, within the parameters of its civil enforcement authority, of holding individuals accountable for malfeasance ad not just the regulated entities they work for?
“The failure to hold any senior executives responsible for the massive misconduct during the financial crisis stands out as a failure in enforcement and not just at the SEC,” said Sen. Sherrod Brown (D-Ohio).
He related the topic to recent scandals at Wells Fargo (illegal and unauthorized customer accounts) and Equifax (a massive data breach, delayed public disclosure, and post-breach stock sales by top executives).
Although CEOs at both companies were forced out, much of their accumulated compensation packages, which continued to increase amid the scandals, were not, proportionally, greatly decreased. In large part, that is because, under both existing and pending rules, clawbacks only apply to direct instances of financial fraud.
“That’s why I favor finishing the rules that the SEC was mandated to enact by the Dodd-Frank Act,” Jackson said. The rules pertaining to executive compensation will ensure accountability and “make sure that investors see, when things like this happen, that executives don’t walk out the door with the kinds of payments you are describing.”
“To what degree is the SEC pursuing the enforcement actions it can against individuals?” Jackson asked. “I would also back up and ask a broader question. Do we have the laws we need? Does the SEC have the tools it needs to bring those cases successfully? The standards of proof are extremely high, the cases can be very difficult to make, and I’m wondering whether the laws that we have are the laws that we need to hold individuals accountable.”
Congress and the Commission must work together to answer that question, he said.
“Why are we settling only with the company without individuals being involved? It really is a case-by-case issue,” Peirce said. “We have to, of course, be able to win the case brought against the individual, but I am worried that too often we are just seeing settlements, costing shareholders money, to take the focus off the executives,” Peirce said. “I will commit to looking at individuals," she said.