WASHINGTON – The SEC's regulatory and enforcement workload may be slowed or stalled now that it is down to only two commissioners, one Democrat and one Republican, observers say.

The commission, which had been operating with only three of five commissioners for nearly a year, lost Mary Jo White, its chairwoman, when President Obama's term ended on Jan. 20. White's voluntary departure leaves the SEC in the hands of Commissioner Michael Piwowar, a Republican who was named acting chair on Jan. 23, and Commissioner Kara Stein, a Democrat. Federal rules set the quorum for the SEC at three commissioners, but allow for it to be less if there are less than three. That means that Piwowar and Stein could adopt rules and take enforcement actions — if they can agree.

Brian Casey, a partner with Barnes & Thornburg in South Bend, Indiana, noted that for the SEC to get anything done, Piwowar and Stein will have to work in unison, something that has "not always been their track record" given their opposite party affiliations and views on the markets.

Paul Maco, a partner with Bracewell here, said that the main concern with having only two commissioners is whether that could negatively impact the SEC's ability to fulfill its core mission of effectively protecting investors, maintaining fair, orderly, and efficient markets and facilitating capital formation. He said that he does not expect two commissioners to adversely affect the commission's ability to fulfill the SEC's mission.

The number of SEC commissioners dropped to two most recently in the late 1990s when Arthur Levitt and Steven Wallman, both Democrats, served together. The SEC was able to function without any significant slowdowns, market participants remember.

Jason Halper, a partner with Cadwalader, Wickersham & Taft in New York, said one problem with the lack of a full slate of commissioners is a loss of diverse viewpoints.

"If all five were seated, each would bring to bear and share via dialogue his or her own unique experience, insight, and points of view," Halper said. Having less than a full complement of commissioners "may lead to rules being passed or decisions made that are not as thoroughly vetted and effective," he added.

Working with only two commissioners will also diminish the SEC's ability to carry out its responsibilities, like approving rules and affirming or reversing its administrative law judges' decisions, in a timely fashion, according to Halper. Some market participants agree that the SEC activities seemed to slow down when the SEC dropped to only three commissioners after former Commissioners Daniel Gallagher, a Republican, and Luis Aguilar, a Democrat, left.

The lack of commissioners might make it harder for the SEC to bring enforcement actions that break new ground or are based on newly approved rules, some sources said. But clear-cut fraud cases aren't likely to have the same problem, they added. The SEC has only an acting director of enforcement — Stephanie Avakian, former deputy director — since Andrew Ceresney left earlier this year.

Both Maco and Halper agreed that having only two commissioners will also hurt the SEC's ability to reach out to other regulators and markets. SEC officials regularly interact with market participants like investors, issuers, and counsel through things like panels at industry events and speeches, among others. With only two commissioners to handle the full scope of SEC activities, they will be less able to reach out and interface with market participants, international regulators and others. "They have 60% less ability to do this with the current vacancies," Halper noted.

(Bloomberg News)
The SEC has been operating under only two out of five commissioners since Chairwoman Mary Jo White left Jan. 20. (Bloomberg News)

The number of commissioners may rise back to three soon though as President Trump has already announced his nomination of Jay Clayton, a partner with Sullivan & Cromwell in New York, to become SEC chair. The Senate Banking Committee will have to hold a hearing on Clayton and he will have to be confirmed by the full Senate.

While Republican lawmakers have applauded the nomination, some Democrats have raised concerns. Senate Banking Committee chair Mike Crapo (R-Idaho) tweeted earlier this week that he had had a "great conversation" about "the role of the SEC in facilitating capital formation and reducing burdens for small regulated entities."

However, Sherrod Brown (D-Ohio), the top Democrat on the banking committee, and some of his colleagues, have said they are concerned about Clayton's Wall Street ties and ability to protect investors.

Casey said that even if the Senate confirms Clayton, he may not be able to participate in some matters because of his past representations of firms.

"The likelihood of conflicts, given [Clayton's] decades representing certain financial institutions and the likelihood that he may recuse himself at least in some instances involving his former clients … leads back to the likelihood that two commissioners of different parties may be left acting for the entire SEC," Casey said. "Particularly since the commission has not finished enacting all the regulations required by Dodd-Frank, continuing to operate with less than a full bench will remain a problem for the foreseeable future."

Questions still remain as to who Trump will choose to fill the remaining two commissioner seats. President Obama had nominated Hester Peirce, a senior research fellow and director of the financial markets working group at the Mercatus Center at George Mason University, and Lisa Fairfax, a law professor at George Washington University. The nominees were forced to wait for hearings in a backlogged Senate Banking Committee and were never confirmed before Obama left office.

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