When Elisse Walter stepped into the chairmanship of the Securities and Exchange Commission last month, she took on a daunting task. Two and a half years after the passage of the Dodd-Frank Act, the Commission has completed only about a third of the regulations it is required to adopt to implement critically important financial system reforms. Many of the most important rules -- governing derivatives, credit rating agencies, and asset-backed securities -- are still on the drawing board. Meanwhile, Congress handed the over-burdened agency a whole raft of new rule-making responsibilities with passage last spring of the Jumpstart Our Business Startups Act (JOBS Act).
Tackling this workload would be a challenge under the best of circumstances, but Chairman Walter must try to reduce this rulemaking backlog with many of the agency's top staffers having headed for the exits in recent weeks and without the benefit of a Democratic majority to fall back on to break any stalemates. Although Walter has been on the Commission for more than five years, even those who follow the agency closely have been left to wonder how she will handle her new assignment. A pending rule proposal to allow mass marketing of hedge funds and other private offerings will provide an early and important test, since on the surface at least it offers a choice between standing by her commitment to investor protection and risking a stalemate or acting promptly to approve a dangerously inadequate rule.
Opponents and supporters alike agree that the JOBS Act requires the Commission to lift the ban on general solicitation and advertising of private offerings so long as issuers take reasonable steps to ensure that they sell only to so-called accredited investors. Strong disagreements have arisen, however, over the appropriate regulatory approach.
- Arguing that removing the marketing ban fundamentally alters the nature of private offerings and increases the risk of fraud, investor advocates, institutional investors, state regulators, House and Senate Democrats, securities law scholars, representatives of senior and labor organizations, as well as the SEC's own broadly representative Investor Advisory Committee have all called on the Commission to incorporate sensible safeguards in its rule. Highly critical of the pending rule proposal for its lack of any such protections, these groups have called for the agency to issue a new proposal that takes a more balanced approach.
- Arguing that Congress never intended the Commission to adopt additional investor protections in lifting the ban, industry representatives have been joined by House and Senate Republicans in urging the Commission to approve its current proposal without additional investor protections and without further delay.
The Commissioners themselves appear to be similarly divided. Commissioner Luis Aguilar has made clear from the outset that he will not vote to approve a rule that does not incorporate appropriate regulatory safeguards. While less emphatic, Chairman Walter's public statements have indicated that she too recognizes both the inadequacies of the current proposal and the need for additional investor safeguards. In contrast, Commissioner Daniel Gallagher and Commissioner Troy Paredes have been strongly supportive of the proposed investor-protection-free regulatory approach and have demanded immediate action to finalize the rule.
That leaves Chairman Walter between a rock and a hard place. Side with industry and further undermine the SEC's credibility as an investor protection agency. Side with investors and risk the ire of the House Republicans who not only oversee the agency but hold the purse strings. Indeed, the same House Republicans who have elsewhere chided the Administration for its over-reliance on interim rules and excoriated the SEC for its inadequate cost-benefit analysis are now expressing outrage that former Chairman Schapiro rethought her initial plan to implement this JOBS Act provision through an interim rule, without any opportunity for prior public comment and without even the pretense of evaluating the rule's potential economic impact.
Chairman Walter has so far given no indication of how she plans to resolve this apparent stalemate. To us the answer is obvious. Not only would approving the current proposal be bad policy, doing so would also be appallingly bad strategy. If Chairman Walter stands by her expressed convictions and insists on incorporating sensible safeguards in the rule, Commissioners Gallagher and Paredes will be the ones who have to choose either to negotiate a reasonable compromise or stall a rule that is a high priority for congressional Republicans. Investors will benefit and so will the legitimate issuers who thrive in a well regulated market.
Since President Obama announced her appointment, no one has questioned Chairman Walter's qualifications. She clearly has the experience and expertise to be a fine chairman. She now has an opportunity to show that she also has the strength of character to lead this often-fractious agency in these difficult and challenging times. Nothing less than the safety and integrity of our capital markets depend on the choices she makes.