Familiar Face Returns to SEC as Two Commissioners Plan Exit

A familiar face with deep roots on Wall Street has returned to the Securities and Exchange Commission to help the agency draft its fiduciary rulemaking just as two agency commissioners are planning to exit.

Commissioners Luis Aguilar, whose term expired on June 5, and Daniel Gallagher are planning to depart as the agency drafts a term sheet on what a fiduciary rule should look like.

Gallagher's five-year term was set to expire in 2016, but published reports say that the Republican commissioner plans to remain on the five-member commission until a successor is confirmed—which could take months.

A spokesperson in Aguilar's office told me that while Aguilar, a Democrat, "has indicated that he's not seeking another term, he has no current plans to leave." He could stay at the agency until the current Congress ends.

Duane Thompson, senior policy analyst at fi360, noted that one "convenience" of having both Aguilar and Gallagher leave at the same time is that it makes it easier for Congress to approve a Democrat and a Republican at the same time. That "keeps parity and avoids deadlock" at the commission, Thompson said.

However, if Aguilar left and Gallagher didn't, Thompson said there could be a 2-2 deadlock on a fiduciary rule vote during SEC Chairwoman Mary Jo White's term as chair.

David Tittsworth, the former president and CEO of the Investment Adviser Association who's now with the law firm Ropes & Gray, added that "pairing a Democrat and Republican obviously enhances the chance for a smooth confirmation process in the Senate." Historically, "most SEC nominees have been approved by unanimous consent by the Senate during either the August or December recesses. But time is running short for the August recess scenario, given the fact that any potential nominee will be subject to a background check, and that a formal nomination will have to occur, followed by a Senate confirmation hearing."

Aguilar has been a very strong proponent of a fiduciary rule while Gallagher has vehemently come out against such a rule.

But just as Aguilar and Gallagher are set to depart, a familiar face is returning to the agency.

Prodigal Son Returns

White announced in late May that Andrew "Buddy" Donohue, former director of the agency's Division of Investment Management, would rejoin the agency as its chief of staff to help shape a fiduciary rule.

White said that Donohue's "deep knowledge of asset management" would be especially useful as the commission "advances its rulemaking agenda for addressing potential risks in asset management and considers a uniform fiduciary standard."

Donohue served as director of the agency's Division of Investment Management from May 2006 to November 2010. Since leaving the commission, he has been managing director, associate general counsel and investment company general counsel at Goldman Sachs in New York.

But critics complain Donohue's return reflects the ongoing revolving door of hiring Wall Street executives to SEC posts.

Americans for Financial Reform—whose partners include the Consumer Federation of America and AFL-CIO—told President Barack Obama in a June 15 letter that it's of "utmost importance" that he nominate candidates to replace SEC Commissioners Gallagher and Aguilar who have "a strong and demonstrated commitment to protecting investors and to moving ahead with needed reforms in our financial markets."

Too often, AFR told Obama, "nominees to serve on the SEC have been 'revolving door' insiders with a history of moving back and forth between Wall Street firms seeking to escape accountability and the agency charged with defending the public interest. At best, the revolving door creates a situation where key commissioners must repeatedly recuse themselves from critical enforcement or rulemaking decisions, which is highly problematic." At worst, AFR continued, it leads to decisions that are "systemically biased toward the interests of financial industry insiders and away from the public and investor interest. We need a dramatic change in approach as compared to the pre-crisis SEC."

Who Will Be New SEC Commissioners?

Hester Peirce, a senior research fellow at George Mason University's Mercatus Center and a former Senate Banking Committee lawyer, is said to be the leading candidate to replace Gallagher.

Published reports say that replacements being considered for Aguilar's spot include former SEC attorneys Keir Gumbs and Philip Khinda. Gumbs is a partner at law firm Covington & Burling in Washington, and Khinda is co-head of the securities enforcement practice at Steptoe & Johnson.

Tittsworth added that if the White House and Senate Democrats "can get their act together fairly soon" on Aguilar's seat, "there's a slight chance that both candidates could be confirmed when the Senate takes its August recess."

Dennis Kelleher, president and CEO of Better Markets, complained in a recent statement that the SEC's rehiring of Donohue to be the SEC chairwoman's "very powerful, very influential" chief of staff constitutes "an affront to the tens of millions of American families who suffered through the 2008 financial crash and are still struggling to recover today."

Kelleher also noted that Donohue worked at the SEC "when the agency was missing in action in the years leading up to the worst financial crash since the Great Crash of 1929."

Fiduciary Rule's Future

At a recent event in Washington, SEC Commissioner Kara Stein said she expects the commission to be presented with a uniform fiduciary rulemaking by White, and that "the devil will be in the details on what that proposal will look like."

If the proposal "were simple," Stein said, Congress would have told the SEC how to implement such a standard in the Dodd-Frank Act. She added that the commission has to think about both the "intended and unintended consequences" of a fiduciary rulemaking. She noted the DOL's fiduciary reproposal is looking at who would be a fiduciary under the Employee Retirement Income Security Act. ERISA, she said, is "different" from securities laws under the SEC's purview.

Stein said it's important to have "robust policy debates" around the fiduciary issue, and that there is no "one silver-bullet solution."

Meanwhile, lawmakers continue to challenge Labor Secretary Thomas Perez's claims that DOL and the SEC have collaborated on DOL's fiduciary redraft under ERISA.

Rep. John Kline, R-Minn., chairman of the House Education and the Workforce Committee, and Rep. Phil Roe, R-Tenn., chairman of the Health, Employment, Labor and Pensions (HELP) Subcommittee, told Perez in an early June letter that they were not satisfied with the answers Perez gave them after their previous requests for such information on March 4 and March 24. "On both occasions, the department failed to provide the requested information," Kline and Roe told Perez.

"Unfortunately, despite two previous inquiries, the committee has not yet received compelling information from DOL that meaningful coordination has taken place between DOL and the SEC," the two told Perez.

But Perez noted at a mid-June hearing held by the HELP Subcommittee the 827 pages of correspondence that he had provided to both lawmakers—a day early—at the "close of business" Monday, June 15.

Kline asked Perez at the hearing if the 827 pages were a "complete list," noting the "great deal of discussion" among lawmakers about whether the SEC should be the one leading a fiduciary rulemaking.

Replied Perez: "We've had extensive conversations with your staff" and have "offered to provide a briefing on the extent of the conversations" between DOL and the SEC. "We're still reviewing everything. This process has taken place over five years. We're continuing to work with your staff. We offered up a briefing to go over the coordination."

Added Perez: "I look forward to our staff's oral briefing. Were we [the SEC and DOL] talking? The answer is: a lot."