New SEC Chief Moves To Toughen Enforcement

New SEC Chairman Mary Schapiro wants to improve oversight of brokers and financial advisers, and regulation of credit-rating firms.
New SEC Chairman Mary Schapiro wants to improve oversight of brokers and financial advisers, and regulation of credit-rating firms. (By Gerald Herbert -- Associated Press)
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By Zachary A. Goldfarb
Washington Post Staff Writer
Saturday, February 7, 2009

Securities and Exchange Commission Chairman Mary L. Schapiro yesterday announced a pair of measures to allow the agency's enforcement staff to launch investigations into financial wrongdoing more quickly and seek penalties from companies that commit fraud.

In her first official action as the agency's new chief, Schapiro ended a program that required the enforcement division to get the approval of the agency's five politically-appointed commissioners before seeking penalties in certain types of cases. The requirement, enacted last year, created significant delays and discouraged staff from pursuing worthy cases, she said.

The new chairman also said she would speed up the process of launching formal investigations into potential acts of corporate crime. Until now, the full commission usually had to take action at a scheduled meeting to approve such an investigation, which provides staff with subpoena power. Commissioners will now be able to sign off on formal investigations outside of scheduled meetings and, for more pressing cases, a single commissioner on duty will be able to do so.

Together, the new measures shift power to the SEC's enforcement attorneys and away from the commissioners, who ultimately sign off on the agency's actions. Schapiro, on the job less than two weeks, has pledged to take the handcuffs off the enforcement division.

"Those who break the law and take advantage of investors need to know that they will face an unrelenting law enforcement agency in the SEC -- an agency that will pursue them until the full force of the law is the sure, certain and sole reward for their wrongdoing," Schapiro said yesterday at a conference on the SEC. "No one should be heard credibly to question whether enforcement is a priority at the SEC. It is, and always will remain, a foundation of our mission."

The announcement of the new measures, which received the applause of the many SEC attorneys in attendance, came two days after top agency officials were pilloried by lawmakers at a hearing on the Bernard L. Madoff case. The SEC has alleged that Madoff, a famed money manager, ran a Ponzi scheme that may have defrauded investors of $50 billion. The SEC has come under criticism for failing to detect the alleged fraud despite repeated warnings and investigations.

Speaking to reporters, Schapiro also said that the Financial Accounting Standards Board, the independent panel that sets accounting rules for U.S. companies, is exploring changes to rules that require firms to mark the value of assets on their balance sheets to whatever the market is paying.

The markets for a wide range of assets have taken a beating over the last year, prompting financial firms to dramatically mark down their assets and, in turn, record significant losses. A person familiar with FASB's thinking said yesterday that the board was not exploring any changes that would fundamentally change how firms account for assets. This person said the changes being contemplated would better define terms and rules surrounding fair-value accounting. The person said an announcement was not imminent.

FASB, which has been resisting pressure to change accounting standards to help firms avoid losses, has so far declined to change these fair-value rules. Responding to a congressional request, the SEC sent FASB at the end of 2008 a list of recommendations to enhance fair-value rules, although the SEC said on the whole the rules should be kept in place. Among other things, the SEC recommended FASB take a closer look at how firms should assign a value to securities for which there is no market. In these cases, the securities may have little or no immediate value, but they do have value over the long term.

"FASB is actively considering those changes," Schapiro said yesterday, adding the changes would be "more around the margins, providing flexibility, interpretative guidance and so forth on 'mark to market.' "

In her speech, Schapiro also laid out her other priorities for the SEC. She said she would look to reform credit rating firms, companies that have received the agency's blessing to judge the quality of securities issued by financial firms. She said she would seek to address "the inherent conflicts of interest credit rating agencies face as a result of their compensation models and limiting the impact of credit ratings on capital requirements of regulated financial institutions."

Other priorities include oversight of central clearinghouses for derivatives, oversight of brokers and investment advisers, and improving auditing of brokers.

Problems relating to these issues have surfaced over the past year. Credit rating firms gave high grades to many of the securities that turned out to be poison on the books of banks. Confusion over exposure to derivatives amplified concerns about the extent of financial losses last fall as the market entered its most severe period. The Madoff case exposed gaps in the oversight of brokers and investment dealers.

"The American people want and expect us to update the regulatory system that has failed them -- and to prevent the kinds of abuses that have contributed to the economic crisis we now face," Schapiro said.

She also said that Wall Street must work to reform itself.

"There needs to be a new era of responsibility on Wall Street and throughout our markets to ensure that wrongs don't occur in the first place," she said. "The sooner that Wall Street works to repair its own problems, the sooner investors will once again find the confidence to invest in what should be the finest markets in the world."

Schapiro yesterday also continued to build out her team, tapping David M. Becker as her general counsel and senior policy director. Becker was general counsel at the agency from January 2000 to May 2002, in part under former chairman Arthur Levitt.

The general counsel plays a key role overseeing a wide range of issues. Becker currently is a partner at District law firm Cleary Gottlieb Steen & Hamilton.

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