A Fierce Regulatory Critic Is Set to Join SEC

Securities Law Daily provides daily coverage of developments in the regulation of federal, state, and international securities and futures trading, with objective coverage of the...

By Rob Tricchinelli

March 11 — One of the fiercest public critics of financial laws and regulations is poised to shape them from the inside as a member of the Securities and Exchange Commission.

The nomination of Hester Peirce, a scholar at George Mason University's Mercatus Center, to fill a Republican seat at the commission will move forward during a March 15 Senate Banking Committee hearing.

Her sharp, lively, critical commentary of capital markets regulation gives no quarter and reaches into nearly every facet of the industry—she singled out sweeping statutes that give the SEC irrelevant rulemaking mandates, data insecurity at the SEC and an overreliance on investor protection, to name a few.

The committee will also consider Democratic nominee Lisa Fairfax, a law professor at George Washington University, for another opening on the commission.

Dodd-Frank Attacks

Peirce has been especially scathing about the Dodd-Frank Act, the sweeping set of financial laws passed in 2010 as a response to the financial crisis of the late 2000s.

“Far from being the cornerstone of a new era of financial stability, however, Dodd-Frank is more likely to be at the root of a future crisis,” Peirce wrote in a January 2015 column.

In her commentary, Peirce said that Dodd-Frank weighed down the SEC with rulemaking mandates outside its core agenda, such as the conflict minerals rule and executive compensation measures.

It is not uncommon for regulators to criticize the regulations their agencies adopt. The commission structure, with seats reserved for both parties, can lead to divided decision-making and biting dissents.

On conflict minerals, for example, former Republican Commissioner Daniel Gallagher frequently and sarcastically attacked the rule, noting that “tantalum would never again take down the likes of Lehman or AIG.”

The agency still has to finish Dodd-Frank rules on executive compensation, including pay versus performance disclosures, clawbacks and prohibitions on certain incentive pay.

Bailout Bashing

In particular, Peirce argued that Dodd-Frank's systemic risk and orderly liquidation authority codify bailouts for large financial institutions and could put taxpayers on the hook for industry malfeasance.

“Dodd-Frank's approach to financial stability simply intensifies the pre-crisis dependence on governmental regulators to shape the financial industry through regulatory prescription and proscription,” she wrote in the January 2015 column. “In weakening the ability of market participants to make their own decisions, the law makes it less likely they will reap the consequences of bad decisions.”

Before working at Mercatus, Peirce was on the staff of Sen. Richard Shelby (R-Ala.), who now chairs the Senate Banking Committee. Before that, she worked at the SEC as counsel to Commissioner Paul Atkins and as a staff attorney in the Division of Investment Management.

Agency Priorities

Peirce has questioned the SEC's priorities, both its overall mission and how it handles enforcement cases.

Of the agency's three-part mission, it focuses too much on protecting investors at the cost of creating fair markets and facilitating capital formation, she said. “The more the SEC makes decisions on investors' behalf, the more reliant they become on the SEC, and the less vigilant and inquisitive they are,” she wrote in June 2014.

Peirce also warned against heavy-handed enforcement, especially when enforcement serves as a tool to advance a particular regulatory agenda.

After Chairman Mary Jo White was nominated in 2013, Peirce cautioned that White would have to work hard to compensate for the views shaped by her experience as a prosecutor.

“Her extensive litigation experience is not a natural precursor to the job for which she was nominated,” Peirce said. “The SEC is fundamentally a regulatory agency, not a law enforcement agency.”

White was the U.S. Attorney for the Southern District of New York before going into private practice at Debevoise & Plimpton LLP in her pre-SEC days.

‘End to Rubber-Stamping.'

In accordance with her view that enforcement is subordinate to rulemaking, “SEC commissioners, as the agency's decision-makers, have an obligation to test the rigor of the staff's work and to reject the staff's recommendations when better courses of action exist,” Peirce said in a 2013 column.

“In the context of enforcement cases, that means an end to rubber-stamping staff-crafted settlements,” she added.

Her views on bad-actor waivers could further a conflict among commissioners over their use.

Under securities laws, financial institutions that commit certain wrongdoings are automatically disqualified from some aspects of securities laws and then have to get waivers from the commission to avoid the automatic sanction.

One such waiver affects well-known seasoned issuer ("WKSI”) status, which allows issuers to use shelf registrations for their offerings rather than seek more exacting approval from the SEC.

“The SEC should not be stingy in granting these so-called WKSI waivers, because they benefit investors by getting more information to them faster,” Peirce said in June 2014.

This could set up a conflict with other commissioners, especially Commissioner Kara Stein, who has repeatedly dissented from granting the waivers and ripped the SEC for doing so .

Among other priority areas, Peirce has called for narrower insider trading laws, criticized the SEC's own internal cybersecurity measures and favored undoing a ban on general solicitations in securities offerings.

To contact the reporter on this story: Rob Tricchinelli in Washington at rtricchinelli@bna.com

To contact the editor responsible for this story: Phyllis Diamond at pdiamond@bna.com