SEC to tread lightly until GOP nominee Elad Roisman approved

SEC Chairman Jay Clayton had an active June with rule-making proposals. But with the SEC's four commissioners now split along party lines after Republican Michael S. Piwowar's resignation on July 7, the commission is expected to face a struggle over contentious measures.

A tiebreaker could be on the way. Mr. Piwowar's replacement, Elad Roisman, chief counsel to the Senate Banking Committee, is now moving through the Senate confirmation process.

In June, Mr. Piwowar's last full month on the commission, the Securities and Exchange Commission proposed three rules, including two on successive days at the end of the month. One rule would make it simpler for exchange-traded funds to begin operating, and the second on the commission's whistleblower program would give the commission discretion to reduce awards of more than $30 million. By a 3-2 vote along party lines, the SEC also voted in June to propose for public comment amendments to the Volcker rule, which prohibits federally backed financial institutions from engaging in proprietary trading or having interests in private equity or hedge funds.

The Volcker rule changes include tailoring rules to a bank's size and clarifying exemptions for banks' proprietary trading activity. The comment period is currently set to end on Sept. 17, 60 days after the proposal was published in the Federal Register.

"I assume that one reason we saw a flurry of proposals a month ago is because the chairman was taking advantage of Piwowar's final days," said Bartlett Naylor, financial policy advocate for Washington-based watchdog group Public Citizen. "But I assume until he gets a third Republican, he's not going to be pushing anything that he really wants."

According to David Tittsworth, a lawyer with Ropes & Gray LLP in Washington and former president and CEO of the Investment Adviser Association, the most controversial issue on the table is the SEC's push for a best-interest standard that compels brokers to put clients' financial interests ahead of their own, requires them to mitigate financial conflicts, and prevents brokers from using the terms "adviser" or "advisor" to describe themselves.

The Department of Labor's fiduciary rule was similar in scope, but the 5th U.S. Circuit Court of Appeals vacated it in March, saying it represented regulatory overreach. The DOL in June decided not to appeal the decision.

Even if Mr. Roisman is confirmed, Mr. Naylor said the SEC will have a tough time passing a best-interest standard without a legal fight. "But if Clayton really wants to leave a legacy, in my opinion, of helping Mr. and Mrs. 401(k), he has the ability to take the current rule and put in the necessary requirements to make it work."

Karen Barr, president and CEO of the Investment Adviser Association, said: "We're very pleased that (Mr. Clayton) has taken some steps in the right direction on this issue, and we will have some comments to help him get it right."

Comments are due Aug. 7.

"No matter happens with Roisman's nomination, (the best-interest standard) is going to be a very difficult issue that's going to require a lot of skill and patience from Clayton if he's ever to get a final set of rules through," Mr. Tittsworth said.

"There's no silver bullet, and I think without at least another Republican commissioner you're not going to see those things move forward at all," he added.

Since Republican and Democratic SEC candidates are traditionally presented together for nomination in the Senate, industry experts didn't expect to wait long for Democrats to announce their selection to replace Commissioner Kara Stein, who is ineligible to serve past December.

Although Ms. Stein's term expired last year, commissioners can stay up to 18 months afterward.

No more than three commissioners may belong to the same political party, so a fellow Democrat must replace Ms. Stein. But two months after Mr. Roisman's nomination across the aisle, the Democrats have yet to announce a choice to forward to the White House.

"I find it very puzzling," said Mr. Tittsworth. "I just don't understand why the Democrats would be dragging their feet at this point when you've got a Republican nominee there and nobody knows what the results of the elections in November are going to be. Why (would) you even risk a delay or risk the possibility that you could get a Republican nomination through the full Senate but not a Democrat? It just really doesn't make any sense."

The Senate Banking Committee held a hearing for Mr. Roisman on July 24. Sen. Mike Crapo, R-Idaho, the committee chairman, had scheduled an Aug. 2 vote on Mr. Roisman's nomination as well as nominations for other agencies, including Kathleen Laura Kraninger, whom the White House nominated to lead the Consumer Financial Protection Bureau.

But the hearing was postponed on Aug. 1 after the Senate entered August recess two days sooner than scheduled. A new hearing date has yet to be announced. The Senate will be back in session Aug. 15.

If approved by the committee, the next step for Mr. Roisman's nomination is a vote in the full Senate. If the Democrats have not made their selection, Majority Leader Mitch McConnell of Kentucky could move Mr. Roisman's nomination alone or wait for the Democratic choice and move them together, as tradition suggests.

Ms. Barr said she expects the Democrats to name a nominee in the coming weeks. The announcement will come from Senate Democratic leader Charles Schumer of New York. "I would have thought that the Democrats would have a stable of potential candidates ready," Ms. Barr said.

Representatives at Mr. Schumer's office could not be reached for comment.

Mr. Tittsworth said he expects Mr. Roisman's nomination and whomever the Democrats select to move together in the full Senate. "If I had to bet I would say the protocol from the last couple of decades will ultimately prevail," he added.

In his Senate Banking Committee hearing, Mr. Roisman, who worked as counsel to Republican SEC Commissioner Daniel M. Gallagher from 2012 to mid-2014, was careful not to tip his hand on any issues he might soon have a voice in deciding.

He was pressed on the best-interest standard by Sen. Elizabeth Warren, D-Mass, who said in an April statement that the proposal doesn't go far enough "to require brokers to put their client's interest first or eliminate obvious conflicts of interest."

In response, Mr. Roisman said he'd "like to speak to the people who ... receive advice as well as provide it to have a better sense of what is actually happening in this space."

Mr. Roisman also said he's a proponent of preserving choice for investors.