When Mary Schapiro steps down as chairman of the U.S. Securitiesand Exchange Commission this week, she'll leave behind a commissioncomposed of two Democrats and two Republicans — an even split thatcould drag an already sluggish agency to a standstill.

Dozens of rules could run aground, including the so-calledVolcker rule to limit risky trading by deposit-holding banks,restrictions on executive pay, a ban on conflicts of interest inasset-backed securities and swaps-market regulations.

“The issues that they're dealing with are divisive issues thathaven't lent themselves to consensus,” said Barbara Roper, directorof investor protection for the Washington-based Consumer Federationof America. “It becomes all but impossible on a commission divided2-2.”

President Barack Obama promoted Democrat Elisse Walter tosucceed Schapiro as chairman when she steps down on Dec. 14. Untilhe wins confirmation for a fifth commissioner, Walter and fellowDemocrat Luis Aguilar must find common ground with Republicans TroyParedes and Daniel Gallagher for rules to move forward.

In an interview, Aguilar described his relationship to othercommissioners as “collegial” and said it will be up to Walter toset the agenda.

“We certainly have different thoughts about how certain thingsshould move forward, but we are in communication,” Aguilarsaid.

It's not just the commission that may find itself at sea. Threeof Schapiro's top lieutenants are leaving as well — Meredith Crossof the public disclosures unit, Robert Cook of the marketsdivision, and General Counsel Mark Cahn — leaving those keyrulemaking offices with uncertain leadership.

Among the most prominent financial-industry rules still underconstruction is the Volcker rule to restrict banks from tradingwith their own money, potentially endangering depositors. The SECis writing this Dodd-Frank Act rule along with four otherregulators.

“I can't imagine the Volcker rule that could get through the 2-2split commission that would satisfy the requirements of the law,”Roper said. “That one seems particularly tough.”

Schapiro told reporters in October that the regulators have“some differences of opinion about how to approach some particularissues.” Gallagher and Paredes both called for Volcker to be putback on the drawing board.

Even if those differences end soon and regulators agree on arule, the SEC may need several months to examine the costs andbenefits before a final vote. The process to weigh each rule'simpacts has become more intensive after the U.S. Court of Appealstossed out an SEC rule last year, saying the agency failed toconduct a proper assessment.

JOBS Act

More recent is this year's Republican-backed Jumpstart OurBusiness Startups Act, which passed Congress with support from bothparties but now faces resistance from Democrats calling for moreinvestor protections.

One provision throws out the ban against hedge funds advertisingfor investors. Schapiro first intended to put the rule on a fasttrack, according to internal e-mails published last week by theHouse Oversight and Government Reform Committee. She was swayed byprotests from consumer groups and said she didn't “want to betagged with an Anti-Investor legacy.” Gallagher said in an e-mailhe was “furious” Schapiro changed her mind.

When the rule was eventually proposed in August, Aguilar votedno, but the rest of the commission voted yes. Walter said at thetime that she had some objections to the proposal and favoredtougher disclosures to make the rule safer for investors. Theprocess will now be hers to direct.

Tom Quaadman, vice president of the U.S. Chamber of Commerce'sCenter for Capital Markets Competitiveness, said his group is eagerto see provisions of the JOBS Act finished.

“It may be that some of this stuff is intentionally beingslow-walked,” Quaadman said.

A slower approach is fine for other rules, he added, includingthose regulating the SEC's share of the $639 trillion global swapsmarket. The CFTC oversees the bulk of the market and has outpacedthe SEC in writing regulations. The SEC still has several rules tofinish for its oversight of security-based swaps, which includessome of the kind of credit-default swaps that helped fuel the 2008financial crisis.

“It may be in everyone's interest that it takes a little longerto get something done,” Quaadman said.

Pace Slowed

Law firm Davis Polk & Wardwell LLP has been trackingDodd-Frank progress, and its latest report last week shows the SEChas finalized just 32 of the 95 rules the 2010 law required. In thefirst year after the law was enacted, the agency averaged ninevotes a month to propose or adopt rules. The pace slowed by abouthalf after the federal-court rejection of a rule for insufficientcost-benefit analysis.

Now vulnerable to similar challenges, the SEC redoubled effortsto study cost-benefit effects. In the last 12 months, the agencyhas proposed nine rules and finalized 22, including routineadministrative actions. It's been more than three months since theSEC adopted a Dodd-Frank rule.

John Nester, an SEC spokesman, declined to comment on howleadership changes could affect specific rulemaking efforts.

“The commission and staff are working hard, as we've statedbefore, to write effective rules as quickly as possible – - withthe emphasis on effective,” he said.

Ira Hammerman, general counsel for the Securities Industry andFinancial Markets Association, is optimistic that rules such asswaps regulation and Volcker — those already under lengthydiscussion and legally mandated — can be finished by thecommissioners.

“They will rise above and find a way to regulate in the areasthat are already on the table,” he said in an interview.

Roper said the Republican Party has made it clear it aims tocounter the 2010 financial overhaul through inaction.

“On Dodd-Frank, they can just say no, and that works for them,”she said. “Clearly, the broader Republican agenda since the 2010election has been to prevent the effective implementation ofDodd-Frank.”

The agency has yet to propose some Dodd-Frank rules on executivepay — one for clawing back bonus money from executives when theircompanies have to restate earnings and one that reports the ratiobetween the pay of each public company's chief executive and itsmedian employee. The regulator has likewise failed to propose a newstandard for brokers dealing with retail clients — a fiduciary dutyparallel to one for investment advisers.

2008 Crisis

Some of the SEC's delayed rules strike at the root of the 2008crisis, including one banning firms from designing asset-backedsecurities deals that put their interests in conflict withinvestors. The SEC didn't propose the rule until September 2011,five months after the law said it should be adopted. The commentperiod was extended twice, and the commission hasn't yet scheduleda final vote.

“Mary Schapiro's leaving with a lot of the hard rules still tobe written,” Quaadman said. “Unfortunately, I think the dynamicsare shaping up that things are going to move at a snail'space.”

One contentious effort that Schapiro sought as a legacy —overhauling money market mutual funds — failed during her tenurebut may move forward after she's gone.

The SEC released a study this week on the effects of 2010changes to industry regulations, research conducted at the requestof Aguilar and the two Republican commissioners that could lay thegroundwork for a new proposal. The study found that while funds are“more resilient now to both portfolio losses and investorredemptions than they were in 2008,” the rule changes wouldn't haveprevented the 2008 collapse of the Reserve Primary Fund that led toan industry run.

“The study indicates that the 2010 amendments weren't enough,”Aguilar said. He said it “may be appropriate to consider thevarious proposals through the prism of the new information.”

In retrospect, Schapiro told Bloomberg Businessweek she “hadn'tanticipated all the hurdles to moving quickly” when she took thejob.

“We got a lot done in Dodd-Frank,” she said, “but many of thetime frames that were built into the law were unrealistic.”

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