Senators Grill SEC Nominees Over DOL Fiduciary Rule, Political Contributions

If confirmed by the Senate, the two new commissioners at the Securities and Exchange Commission, Hester Peirce and Lisa Fairfax, will be instrumental in helping the agency determine the outcome of a potential uniform fiduciary rule for brokers and advisors as well as whether the agency will require advisors to receive a third-party audit.

Peirce noted during her testimony in mid-March at the Senate Banking Committee confirmation hearing that she is "quite worried" that the Department of Labor failed to consider the agency's input on its forthcoming rule to amend the definition of fiduciary on retirement advice, and that she fears the rule will "cut a whole segment of people" from access to advice.

Peirce, a Republican, along with Lisa Fairfax, a Democrat, faced congratulations — and sometimes heated questions — from members of the committee during their confirmation hearing.

Sen. Tim Scott, R-S.C., said during the hearing that he worries DOL's rule to change the definition of fiduciary under the Employee Retirement Income Security Act "will make winners and loser of small investors." He then asked Peirce and Fairfax their thoughts.

"I'm quite worried about DOL's proposal because I've heard that the SEC's input wasn't considered," Peirce responded. "We need to understand how rules like this are going to impact everyday people," she said, adding that if confirmed, she would "want to see what work SEC and DOL had done" on the rulemaking.

"Protecting investors in this [retirement] space and protecting access to advice is also important," added Fairfax, "particularly for low- and middle-income investors."

Both Peirce and Fairfax agreed that economic analysis of rules as well as retrospective reviews of rules are important, with Peirce noting that the "equity market structure" rules that the commission has "built up" over many years need to be reassessed.

Views on Admissions of Guilt; Corporate Political Spending

As to the SEC's "neither admit nor deny" policy when it comes to enforcement actions, Peirce said, "There's a stronger message if there's an admission of wrongdoing," adding that "repeat offenders is a case where it is worth it [for the SEC] to take the extra resources to get an admission of wrongdoing."

She added that the SEC needs more expertise in the fixed-income area.

Sens. Chuck Schumer, D-N.Y., and Bob Menendez, D-N.J., grilled both women on whether they believed the commission should take up a petition for rulemaking now before the agency addresses corporate political spending.

Schumer said that he was "very upset" that SEC Chairwoman Mary Jo White "has not gone forward on this" request for rulemaking, which has received a whopping 1.2 million comments. Schumer pressed both on providing "an answer, not gobbledygook" on where they stood on taking up such a measure if confirmed.

Both noted a "budget bill that appears to prevent rulemaking" on this very issue, with Peirce stating, "I think the commission doesn't have the freedom to ignore mandates from Congress." She added: "The Congress has said it should not be a priority for the SEC."

Responded Schumer: "That doesn't cut muster with me. Right now I'd be leaning against both of your nominations given your answers."

Sen. Elizabeth Warren, D-Mass., took Peirce to task on her vocal opposition to the Dodd-Frank Act, notably the book she wrote, "Dodd-Frank: What It Does and Why It's Flawed," and questioned her ability to help the agency "write and enforce" dozens of Dodd-Frank rules given her opposition.

"I wrote those comments not in the context of a regulator but in the context of an academic," Peirce responded, noting that she spent eight years at the commission as a regulator. Peirce wrote the book while she was a fellow at the Mercatus Center think tank at George Mason University, a position she still holds.

Peirce would replace SEC Commissioner Daniel Gallagher, who left his post on Oct. 2; Gallagher's term was to expire in 2016. Peirce has also served as a lawyer for the Senate Banking Committee.

Fairfax is a George Washington University law professor and replaces Luis Aguilar, who left the agency on Dec. 1. Fairfax is the Leroy Sorenson Merrifield Research Professor of Law at the George Washington University Law School. Prior to joining the GW law faculty, she was a professor of law and director of the Business Law Program at the University of Maryland School of Law.

Fairfax said during the hearing that she has "never held a securities license."

— Read "The SEC's Priorities in a Tricky Year" on ThinkAdvisor.