President-elect Barack Obama’s pick to fill the top spot at the Securities and Exchange Commission plans to make reinvigorating enforcement at the Commission her top priority if she’s confirmed.
“With investor confidence shaken, it is imperative that the SEC be given the resources and the support it needs to investigate and go after those who cut corners, cheat investors, and break the law," Mary Schapiro told members of the Senate Banking Committee during her Jan. 15 confirmation hearing
of Financial Industry Regulatory Authority chief executive Schapiro, a veteran regulator who has served as an SEC commissioner and as chair of the Commodity Futures Trading Association, to lead the SEC comes as the agency is under fresh criticism for regulatory failures during the worst financial crisis since the Great Depression and for its failure, despite credible tips, to uncover the massive alleged fraud perpetrated by money manager Bernard Madoff. In particular, the Madoff scheme has increased concerns about weaknesses in the agency’s inspection and enforcement functions.
“One of the first things I’ll do will be to try to take the handcuffs off the enforcement division,” Schapiro said in response to a comment by Rhode Island Democrat Jack Reed, who blamed a 2006 penalty pre-approval pilot program
as hobbling the SEC’s enforcement staff.
While she said the penalty pilot program
“is an issue,” Schapiro added,“There are a lot of other procedural hurdles that have been placed in the way of the enforcement division moving aggressively to issue subpoenas and get investigations initiated ... I would plan to look at those immediately.”
Schapiro also vowed to “re-engage” the SEC with investors and to work to deepen its commitment to investor protection, transparency, accountability, and disclosure.
“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,” she said.
As for FINRA’s role in failing to detect the Madoff scheme
, she said FINRA had jurisdiction over Madoff’s broker-dealer activities, but not its investment adviser activities, where the alleged Ponzi scheme was perpetrated.
“FINRA wasn’t aware of the investment adviser fraud,” she told lawmakers. “FINRA also hadn’t received any tips directly from anybody, nor did the SEC share those tips with FINRA.”
If confirmed, Schapiro said she’d also act quickly to create an “entirely new” centralized process for handling tips and whistleblower complaints at the SEC.
Schapiro said a lesson from the Madoff scandal is that the current “stovepipe” approach to regulation allows misconduct to take place out of the sight of some regulators.
The bigger issue, she said, is an increasing migration of financial activity out of regulated broker-dealers—where there’s SEC, FINRA, and other SRO and state involvement in regulation—to investment advisers, where there are far fewer resources available for inspection and oversight.
She also said it’s essential to reconstitute the SEC's Office of Risk Assessment
. “There will never be enough resources to do everything, so we have to be able to focus on those areas of risk where we have investors in the most danger,” she said.
Schapiro called for eliminating gaps in the current regulatory structure, saying, “All systemically important products and financial institutions need to come under the regulatory umbrella,” including credit default swaps and hedge funds.
Schapiro also responded to criticism that she’s a “predictable and safe regulator,” but not the “robust” regulator needed to lead the agency.
“I have never been afraid to go after people I thought violated the public trust," she said. "There are absolutely no sacred cows.”
Compliance Week will provide readers with full coverage of the hearing in its Jan. 20 edition.
Schapiro’s nomination must be confirmed by the full Senate.