Schapiro's SEC Expected To Step Up Enforcement
Wednesday, February 4, 2009
Mary L. Schapiro, the new chairman of the Securities and Exchange Commission, will move quickly to invigorate its enforcement division and demonstrate the agency's relevance at a time when lawmakers are contemplating a vast restructuring of the nation's financial regulators, her associates said.
Within days, Schapiro may do away with a three-year-old requirement that the enforcement division's lawyers get approval from the agency's commissioners before negotiating to impose penalties on companies accused of wrongdoing, according to people familiar with the discussions. This rule is considered by many SEC lawyers as an impediment to effective enforcement, and fines levied against corporations have fallen 85 percent since the requirement was put in place.
She is also looking to address the heavy caseload carried by lawyers at the enforcement division, associates said. In recent years, staff turnover has been extremely high; enforcement teams have had only seven or eight lawyers, compared with a standard size of 15 lawyers; and the total number of lawyers available to investigate cases has decreased by 10 percent, according to a recent speech by Commissioner Luis A. Aguilar. Schapiro may redirect open SEC slots to the enforcement division and seek additional funds from Congress for new enforcement hires, one associate said.
This would not be the first time Schapiro has been tasked with reviving a struggling regulatory agency. In 1996, she joined the National Association of Securities Dealers, the financial industry's self-regulator, after it was accused of failing to effectively oversee brokerage firms. Schapiro revamped the organization.
She now faces the challenge of remaking the SEC, whose reputation has taken several hits, including the failure of prominent investment banks on its watch and revelations that it failed to detect the $50 billion Ponzi scheme allegedly perpetrated by Bernard L. Madoff.
A panel of the House Financial Services Committee is holding a hearing on the Madoff affair today, and a handful of senior SEC officials are scheduled to testify. This is the third congressional oversight hearing for the agency in less than a month.
As SEC chairman, Schapiro will play a leading role in advancing new regulations for a wide swath of the financial market, from the activities of credit-rating companies and investment advisers to trading in exotic derivatives. But many of those efforts will require congressional action. So Schapiro's immediate steps will look inward.
"This crisis has exposed weaknesses and gaps in the regulatory system that have led to a loss of investor confidence. We must help to restore that lost confidence -- that is our challenge," she wrote in her inaugural message to the staff. "Success in this endeavor demands that we as an organization engage in serious self-evaluation. That means taking an honest look at everything we are doing and how we do it." Schapiro did not comment for this story.
Schapiro has already begun talking to potential candidates for the top post at the enforcement division, now headed by Linda Chatman Thomsen, a 13-year veteran of the agency. Thomsen is viewed by many current and former SEC lawyers as a skilled and effective enforcer whose desire to pursue aggressive cases came up against barriers under the recently departed SEC chairman, Christopher Cox.
Still, associates said Schapiro will want to install one of her own atop the enforcement division and has been talking about the job with several people who have experience as federal prosecutors. When Schapiro was named head of the NASD's regulatory arm in 1996, she swiftly removed two top officials and replaced them with confidantes. The associates spoke for this story on condition of anonymity because Schapiro has not yet unveiled the initiatives.
Unleashing the enforcement division to go after wrongdoing on Wall Street could run into outside pressures, though, at a time when the government is pumping billions of dollars into the financial sector to prop it up.
"There will be political pressure and other pressure from financial services firms who say that they are hurting and ask whether it makes sense to bring enforcement cases," said Brian Rubin, a former SEC enforcement lawyer.
Schapiro, a former chairman of the Commodity Futures and Trade Commission and a former SEC commissioner, already has one close confidante at the agency: Elisse B. Walter, one of the agency's commissioners. Walter was one of the top members of Schapiro's team at the Financial Industry Regulatory Authority, the successor to the NASD, and also knows her from the CFTC. Schapiro has other slots to fill in the short term, including general counsel, chief accountant and head of corporate finance.
One of her first hires is Kayla Gillan, chief administrative officer at the shareholder consulting firm RiskMetrics Group, as a top adviser, according to a person familiar with the matter.
Gillan was a founding member of the Public Company Accounting Oversight Board and for six years was the general counsel for California's state workers retirement system.
Over the slightly longer term, Schapiro may be contemplating the establishment of a group focused on identifying and preventing risks in the market, associates said. When he was SEC chairman, William H. Donaldson created such a group, called the Office of Risk Assessment, but it has struggled to gain traction. Schapiro was well-known for creating what she called an Ahead of the Curve group at FINRA. She is also likely to take a fresh look at the Office of Compliance, Inspections and Examinations, which has often tussled with other divisions responsible for setting regulations.
Though she has pledged an ambitious enforcement agenda, Schapiro's own record isn't without blemish. At FINRA, she went after biased investment-banking research, fraudulent brokers and mutual fund sales abuses. But some securities lawyers and financial commentators say she wasn't aggressive enough.
The Schapiro-led NASD, as well as the SEC, were both criticized by Eliot L. Spitzer, then New York's attorney general, for failing to discover that Wall Street analysts were privately disparaging stocks they were publicly praising. And studies have shown that fines levied by FINRA against financial firms -- in particular, big fines -- have fallen in recent years.