Subtraction Changes Math at SEC
With the Senior Democrat's Departure, All Eyes Are on the Chairman

By Carrie Johnson
Washington Post Staff Writer
Thursday, September 13, 2007

The senior Democrat at the Securities and Exchange Commission is to step aside Tuesday, leaving the nation's top stock market watchdog without a full complement of five commissioners for the first time since a wave of scandals began to devastate investor confidence in 2002.

The departure of Roel C. Campos for a lucrative law partnership would leave three Republicans and one Democrat on the panel, raising questions among policy analysts about the fate of corporate-enforcement efforts and divisive rule proposals.

The practical impact of the exit is far from certain, however. SEC Chairman Christopher Cox, a former GOP lawmaker, often has sided with Democrats while striving to pass new rules and crack down on questionable business practices. And whenever possible, he has made a point of seeking consensus, resulting in a series of unanimous votes. The question now, agency insiders say, is whether Cox will continue to steer a moderate course that at times could result in gridlock or whether the SEC instead might succumb to partisan discord.

"This may well be a very tough time for the commission in terms of its ability to make decisions when you have the kind of 2-to-2 split that seems to be emerging," said Meyer "Mike" Eisenberg, a retired SEC deputy general counsel.

Cox succeeded in tamping down dissent, at least publicly, by accommodating concerns from the panel's sometimes warring factions. But on a small number of the most critical issues before the SEC, including whether and how much to fine errant businesses and give investors more power to select corporate board members, unanimity was difficult at best.

With Campos gone, corporate lawyers and lobbyists will closely follow whether Cox casts his lot with the remaining agency Democrat, Annette Nazareth, or with Republicans Paul Atkins and Kathleen Casey, who have focused on the cost of rules as well as the benefits.

For example, Atkins and Casey openly criticized fining companies in ways that they say penalize current shareholders. An SEC pilot program launched this year gives the five commissioners more control over the process, requiring enforcement staff members to get their approval before beginning settlement talks with companies.

The Republicans also voted against issuing a proposal that would give investors greater say in naming corporate directors. Instead, late in the process, they pressed Cox to release a separate, conflicting plan.

To give both sides their say, Cox voted this summer to support each of the competing plans. The SEC is tentatively scheduled to revisit the subject at a public meeting in November. Cox's position as the man in the middle will only intensify after Campos's departure.

The five SEC commissioners presented a joint statement at a June hearing of the House Financial Services Committee asserting the importance of a clear and consistent approach. "It is the rule of law, not one's political point of view, that should determine our actions," they wrote. "It is in this spirit that we intend to continue to tackle the significant challenges that lie ahead."

Lawmakers may hold the agency to that promise. Labor unions have been urging Democratic legislators to send a message that pushing through divisive policies while the commission is short on Democrats would not be met with favor in Congress.

No immediate replacement for Campos is in sight. The first step toward filling his slot must come from Congress, and senior Democratic lawmakers have not yet sent the White House any names of candidates. The nominee would require Senate approval, which could prove difficult as Capitol Hill trains its attention on the war in Iraq and next year's elections.

Meanwhile, Nazareth, the other Democrat on the panel, has removed her name from consideration for reappointment and told friends she would like to leave the SEC by the end of the year, adding another layer of uncertainty. Her term expired in June, but she is able to remain in her post for up to 18 months.

The prospect of having no Democratic representation at the agency in the waning months of the Bush administration, said Joel Seligman, a securities law scholar, "is exactly the way SEC governance was designed not to work."

He added: "It's deeply troublesome for the commission to go forward without bipartisan support."

"If Annette goes, it does force the hand of the administration in terms of appointing new members, because if they do anything that's controversial it could be criticized as being partisan, if they do it without a full complement of Democratic members," said Barbara Roper, director of investor protection at the Consumer Federation of America.

That concern is what might push Cox toward a more cautious or conciliatory approach. In the event of a 2 to 2 vote, officials said, any new rule-making proposal or enforcement case would stall. That is all the more important this year since the SEC is in the midst of uncovering possible malfeasance in the mortgage-lending sector and monitoring whether banks are playing down their losses on housing-related investments.

Not all observers are concerned. "Investors shouldn't worry that the agency is going to stop operating," said Richard C. Breeden, SEC chairman under President George H.W. Bush. "The basic work of processing registration statements and bringing enforcement cases, that's all done by the staff."

Washington insiders note that it is far from rare for federal agencies to operate without a full slate of leaders. The Consumer Product Safety Commission, for instance, lacks one of its members just as safety recalls for toys and other goods manufactured in China have spiked. The SEC itself tried to do its work with only two commissioners back in the 1990s.

That was before collapses at Enron and WorldCom enraged Main Street investors and refocused attention on the work of the SEC, created to restore confidence after the stock market crashed nearly 80 years ago.

View all comments that have been posted about this article.

© 2007 The Washington Post Company