Crunch time on Wall Street rules for SEC

Crunch time on Wall Street rules for SEC
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The Securities and Exchange Commission is caught in the middle of a regulatory tug of war in its final months under President Obama.

The financial industry and advocates for tougher rules on Wall Street are jockeying for influence over the agency's unfinished agenda.

Financial regulators across the board have been working on a slew of projects since the financial crisis, but the SEC has lagged behind other agencies in wrapping up its work.

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Now, competing interests are pushing their own wish lists for the SEC to tackle before a new administration takes power.

For her part, Chairwoman Mary Jo White laid out an ambitious agenda for 2016, which some observers believe could be her final year at the agency, with a new president likely looking to make his or her own mark on the high-profile agency.

White’s term at the SEC does not expire until 2019, but sources say she’s indicated this would be her last year.

“The agenda for 2016 is a very busy one and we will work hard to advance as many of these priorities as we can,” said White back in February.

The SEC faces a number of competing demands — and limited time.

Industry sources expect the SEC to finish off rules proposed in May meant to streamline how businesses report and disclose data, updating methods firms say are outdated and burdensome. Sources say these rules could be finished off at a September meeting as part of a broader package of rules on registered investment funds.

They also expect the SEC to finalize a rule proposed in September that mandates investment funds to develop liquidity risk management programs. It's meant to protect investors in mutual funds and exchange-traded funds and allow them to more easily buy and sell their shares.

On the other side, advocates for tougher financial rules are pushing the SEC to wrap up work on lingering regulations from the Dodd-Frank financial reform law, passed back in 2010.

Among those items are rules that would set new requirements on how executives at financial institutions earn a paycheck. Those rules would implement a part of Dodd-Frank aimed at ensuring compensation plans don't encourage bad behavior from executives looking to boost their paychecks.

But given that the investment fund rules have a statutory deadline while the compensation rules do not, it’s likely the SEC will focus its work on the former.

Regulatory advocates are also pushing for a set of rules that would bar financial firms from engaging in certain securities trades that pose a conflict of interest. That Dodd-Frank language was aimed at barring certain trades seen during the financial crisis, in which institutions sold securities loaded with risky mortgages to clients, while betting in house that the securities would fail.

The SEC proposed that rule back in 2011, but despite prodding from lawmakers, has yet to finalize it.

“They have an enormous number of significant rules that are kind of stacked up at the proposed rule stage, sometimes for many years,” said Marcus Stanley, policy director for Americans for Financial Reform.

There are other projects that advocates of tougher rules on Wall Street are hoping the SEC will eventually address, including a stricter “fiduciary duty” standard on investment advisers, and perhaps the crown jewel of their agenda, a rule requiring companies to disclose their political spending.

White has been repeatedly pressured by advocates of tough rules and Democrats on Capitol Hill for a rule forcing companies to make public where they spend money on political matters, but has resisted those efforts.

Other projects on the SEC’s radar include new rules on asset managers, projects on the structure of financial markets, and one initiative that is proving increasingly contentious: disclosure.

The push-and-pull between industry and advocates is evident on the SEC’s review of corporate disclosures for investors. White has indicated that the SEC is concerned that investors are overloaded with information in those public documents, and is exploring ways to streamline the process.

But proponents of tougher rules argue investors need more information from corporations. And they see the SEC’s work on this matter as coming at the expense of other projects that remain unfinished.

“There are some things that the SEC seems to be taking on that we’re concerned about,” said Heather Slavkin Corzo, director of the AFL-CIO’s Office of Investment.

The lingering frustration over unfinished regulations is also capped by a growing discontent among advocates over how the agency has operated under White.

A former white-collar attorney and prosecutor, White was billed as a tough-nosed enforcer and easily confirmed by the Senate. But since then, she has repeatedly sparred with former backers on the left who argue the agency shows too much deference to Wall Street, and too few teeth on rules and enforcement.

“We think that a major cultural shift needs to happen at the commission,” said Slavkin Corzo. “Generally speaking, we need financial markets regulators that believe in regulation, that believe in enforcement.”

Wall Street counters that White is simply playing it straight, hearing all sides of an argument before acting.

But business groups are also eager for her to finish up work on a rule limiting how much risk an investment portfolio can take on through derivatives, contract-based investments.

Jim Overdahl, partner at Delta Strategy Group and an economist who authored a paper critiquing the derivatives rule, said the proposal could limit safer bet-hedging derivatives and steer investors toward riskier ways to diversify their portfolios.

Advocates say the rule would protect investors from risky bets, but industry and some economists say it doesn’t differentiate enough between safer, simple derivatives and complex, riskier ones.

Industry sources say they’d like to see the derivatives rule done under White’s tenure to take advantage of her known track-record and momentum from months of meetings.

Whatever the SEC does get done this year could leave Wall Street and regulatory advocates unsatisfied.

Tom Quaadman, senior vice president for the U.S. Chamber of Commerce’s capital markets wing, said the agency’s misplaced priorities have delayed work on rules to bolster American businesses.

“That priority list has put some positive things that should get done at the bottom of the pile,” said Quaadman.

And with just a few months left under Obama, advocates also don’t expect much out of an agency that has disappointed them in recent years.

“We’ve been hoping for a long time that the SEC would get a lot more done than it has,” said Dennis Kelleher, president and CEO of Better Markets. “It’s starting to look a little quixotic.”