SEC Nominee Gets Hearing

The Trump Administration’s nominee for an open seat on the Securities and Exchange Commission appeared before the Senate Banking Committee on Tuesday, and while his nomination is probably in good shape, he endured sharp questions from Democratic committee members on SEC enforcement and conflict-of-interest rules.

The nominee, Elad Roisman, is currently chief counsel for the Banking Committee — not that his insider status did him any favors with Democratic senators on the committee. The sharpest questioning came from Sens. Elizabeth Warren, D-Mass., and Sen. Bob Menendez, D-N.J. They asked Roisman why conflict of interest rules shouldn’t apply to broker-dealers and investment advisers. They support a uniform standard of conduct to make both groups act in their clients’ best interests.

“Your doctor cannot prescribe you drugs in order to get kickbacks from drug companies; your lawyer cannot represent a party on the other side in order to get double payment,” Warren said. “Why should your investment adviser be able to get a kickback from a company for recommending a particular product that’s not the best product for you?”

Menendez said a current SEC proposal on the issue falls short by putting the onus on customers to understand the differences between brokers and advisers.

Photo courtesy: Bloomberg

Roisman said the SEC traditionally has been a disclosure agency, and investors should have adequate disclosures to understand the relationships and any conflicts that exist so they can make an informed decision. Roisman, who repeatedly said he didn’t want to pre-judge SEC proposals when asked specific questions, hinted at being against a uniform standard, arguing that investors need a choice of types of services and smaller customers could get shut out if there weren’t different options. He feels the current system is working.

“We can all acknowledge, or I hope we can acknowledge, the amount of people doing wrong is small,” Roisman said. “We need to get them out, but it’s not an entire industry.”

Roisman was nominated as the Republican replacement for Michael Piwowar, who left the SEC earlier this month. Roisman was a securities lawyer at a large New York law firm, a chief counsel with NYSE Euronext, and counsel to former SEC commissioner Daniel Gallagher before taking his job with the Senate Banking Committee.

Roisman called the U.S. capital markets “the envy of the world,” and said the SEC plays an important role in preserving that. His priorities if confirmed would be promoting investor confidence, capital formation, secondary market liquidity for smaller companies, and dispelling the notion that the markets are “rigged against the little guy.”

“One way to do that is by having a strong enforcement program, one that holds regulated entities and individuals accountable,” Roisman said.

Enter the Skeptics

Sen. Sherrod Brown, D-Ohio and ranking Democrat on the Banking Committee, took issue with Roisman’s goal of dispelling the notion the system isn’t rigged. Brown said banks are making huge profits and executive compensation for CEOs of the largest banks rose an average of 22 percent from 2016 to 2017. Meanwhile, bank tellers are still making about $12.50 an hour.

“We need you to particularly be vigilant to make sure the system is not rigged against the middle class and against workers because this government clearly sings with an upper class accent, and this committee has collective amnesia about what happened 10 years ago,” Brown said.

Brown also expressed concerns over the downward trend in enforcement actions and penalties levied by the SEC. Brown added that he plans to ask the Government Accountability Office to review the reliability and transparency of SEC enforcement statistics.

“Market participants need to see meaningful efforts by the SEC to enforce the law and to punish bad actors,” Brown said.

Roisman said he doesn’t necessarily “gauge the success of the program based on numbers. I think it depends on the type of cases and the impact certainly on recidivism.”

When Roisman’s nomination might move forward to a confirmation vote is unclear. Typically the Senate likes to approve SEC commissioner nominees in pairs of one Democrat and one Republican; and commissioner Kara Stein, a Democrat, is serving beyond her term and must step down by the end of this year.

The Trump Administration, however, has not nominated a Democrat to succeed her. Given all the other issues on the Senate’s plate these days, anyone waiting to see the commission back at full strength should not hold his or her breath.

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