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Empty seats at regulators hold back Trump bid to undo Dodd-Frank

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President Trump’s push to roll back Wall Street regulations is being held up by his inability to fill open seats at the two main agencies charged with overseeing the financial industry.

The White House’s inaction has left the Securities and Exchange Commission and Commodity Futures Trading Commission with just two members each, one from each political party. That’s given the lone Democrats at each regulator the unusual power to block policy moves they disagree with.

The dynamic is putting a spotlight on the SEC’s Kara Stein and the CFTC’s Sharon Bowen, two commissioners who have been full-throated supporters of tightening industry rules after the 2008 financial crisis. Instead of being shunted aside as Republicans took control of the government this year, the two are being heralded as big impediments to Trump’s deregulatory agenda.

“Many are waking up now to the reality that two Democratic commissioners at two little regulators may stand in the way,” said Tyler Gellasch, a former aide to Stein who’s now executive director of the Healthy Markets Association, whose members include mutual funds and other large investors. “They don’t get to write the rule, but they can stop it.”

The two Democrats’ sway looms especially large because Republicans and Trump have made little progress on Capitol Hill trying to repeal the 2010 Dodd-Frank Act, the post-crisis law that loaded new rules on Wall Street. With Congress bogged down on other contentious issues and little consensus about rewriting Dodd-Frank, the Trump administration will need to rely on federal agencies such as the SEC and CFTC to provide the promised regulatory relief.

That point was underscored last month by Mark Calabria, the chief economist for Vice President Mike Pence, who said that the Obama-era rules could be “easily erased once we have new regulators in place."

Trump has chosen securities lawyer Jay Clayton to run the SEC and CFTC Commissioner J. Christopher Giancarlo to head that agency. Their nominations are pending in the Senate.

The Senate Banking Committee approved Clayton on Tuesday, sending his nomination for a vote in the full chamber. Even if Clayton is in place, Stein could still block Republicans’ efforts under the agency’s quorum rules by not showing up at a vote.

The administration will need to fill additional commissioner seats at both agencies if it wants to break the logjam. Still, getting nominees vetted and approved by the Senate will take months -- and Trump hasn’t announced any other picks for the five-member commissions.

On Tuesday at a meeting of business executives, Trump reiterated his pledge to rollback financial regulations, saying his administration plans a “very major haircut on Dodd-Frank.” Wall Street, however, seems to be losing faith that it will happen any time soon. The KBW Bank Index of 24 financial companies is now down for the year after surging 30% in the fourth quarter of 2016.

Stein declined to comment for this story. Bowen said in a statement that “it would be a mistake to repeal Dodd-Frank and all the evidence-based, smart regulations that have been put in place over the last seven years." She said she looks forward to working with the commission’s Republican chairman to "consider how we can make our regulations better."

Despite the talk of cooperation -- neither commissioner has publicly threatened to use the veto power -- many Democrats see Stein and Bowen as an important bulwark.

Indeed, their records show they’ve been willing to stand up to the financial industry.

Stein, for example, used SEC procedural rules to demand additional penalties for Wall Street banks settling enforcement cases, turning what had been an obscure issue into a flashpoint at the agency and on Capitol Hill. Stein’s effort has been championed by Democratic Senator Elizabeth Warren of Massachusetts, a leading critic of financial firms.

At the CFTC, which oversees the $544 trillion swaps industry, Bowen has also taken a tough stance.

In 2015, she opposed a CFTC rule that benefited Goldman Sachs and other firms by freeing them from having to post billions of dollars of collateral for certain derivatives trades. Bowen also took on high-frequency traders in November when she supported making it easier for regulators to access their secret algorithms.

The two Democratic commissioners’ views stand in stark contrast to those of Trump’s picks to head the SEC and CFTC. Clayton and Giancarlo have made it clear they’re eager to follow through on the president’s agenda.

Clayton told Senators at his confirmation hearing last month that rules related to Dodd-Frank should be reviewed.

And Giancarlo, who is running the CFTC on an acting basis while awaiting Senate confirmation, recently ordered an agency-wide review of rules to make them less costly for business. He says the regulator is “reinterpreting” its mission.

With Republicans in charge of Congress and the White House, some industry groups say it would be counterproductive for the Democratic commissioners to use their temporary power to block the deregulatory push. Soon enough, they say, the agencies will be back to full strength with three Republican appointees controlling the agenda.

“Sure, they can obstruct things for a period of time, but that also may marginalize their ability to get things done when there’s a full commission,” said Tom Quaadman, senior vice president of the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness.

Bloomberg News