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A New SEC Chief Faces New Problems in ’09

Melissa Klein Aguilar | January 6, 2009

The new head of the Securities and Exchange Commission will have her hands full in 2009: multiple contentious rulemaking projects, possibly consolidating the SEC with other government agencies, and a slipshod enforcement division that let the largest Ponzi scheme in history strike thousands of investors.

By most accounts, Mary Schapiro is well-prepared for the challenge.


Nominated last month by President-elect Barack Obama, Schapiro has an impressive range of experience. Currently CEO of the Financial Industry Regulatory Authority, she was also an SEC commissioner in the 1990s and chairwoman of the Commodity Futures Trading Commission. Industry observers say that sort of background makes Schapiro, 53, well-suited to head the SEC at this crucial juncture.

Philip Khinda, a former SEC attorney and now partner at the firm Steptoe & Johnson, sums this opinion up nicely: “Mary Schapiro has enforcement credibility and great regulatory experience,” he says, “and she’ll need every bit of it.”

Schapiro’s appointment still needs Senate confirmation, but no objections have been raised on Capitol Hill and plaudits have poured in from all corners of the business and financial communities. The appointment is “one that instills a lot of confidence inside and outside the agency,” and “signals good days ahead for the Commission,” says James Doty, a former SEC general counsel who now works at the law firm Baker Botts.


Above all, Schapiro’s challenge as chairwoman will be to restore confidence to the SEC’s battered reputation, and give it a voice at the table as the Obama Administration and Congress try to piece the U.S. financial system back together. Already under sharp criticism from lawmakers who’ve questioned its role in the financial crisis, the agency suffered another black eye in December with the massive scandal surrounding Bernard Madoff, the Wall Street money manager accused of a $50 billion securities fraud.

In a Dec. 16 mea culpa, departing SEC Chairman Christopher Cox acknowledged that the SEC failed, for nearly a decade, to investigate allegations surrounding Madoff and his firm. He called for a full probe by the SEC’s inspector general into where the agency went astray.

The Madoff mess follows two earlier reports by SEC Inspector General David Kotz, one questioning the impartiality and fairness of the agency’s investigation of possible insider trading at Pequot Capital Management, and another criticizing its failure to supervise investment bank Bear Stearns adequately before its collapse earlier this year.

“Mary Schapiro has enforcement credibility and great regulatory experience, and she’ll need every bit of it.”

— Philip Khinda,
Steptoe & Johnson

In other words, “She has her job cut out for her,” says Amy Greer, formerly an attorney in the SEC Enforcement Division and now partner in the law firm Reed Smith. “She needs to instill confidence in the SEC from the outside and the inside.”


Greer says Schapiro’s public remarks as the head of FINRA show a focus on “striking a balance between innovation and the need to protect investors”—a focus Greer says will serve the market well if Schapiro becomes SEC chairman.

“Her priorities and the agency’s priorities fit nicely with the needs of the markets and the challenges facing this administration,” Greer says. “She’s coming into an administration and a time where she’ll have remarkable opportunity to remake the regulatory system.”

Where to Start

Schapiro will take charge without many strong players on the bench. In recent months, the SEC’s general counsel, chief accountant, deputy chief of staff, and head of the Corporation Finance Division have all announced plans to leave the agency; the critical New York regional office only has an interim director. And two nuts-and-bolts jobs, the chief information officer and the SEC secretary, are staffed by appointees only on the job for a few weeks.

Also unclear is the fate of Linda Chatman Thomsen, head of the SEC’s Division of Enforcement. Thomsen has not announced any plans to leave the Commission along with other notable officials from the Cox era, but her office has been scorched by SEC critics, and stronger enforcement will clearly be a high priority for Schapiro and the Obama Administration generally. Thomsen has been the SEC’s top enforcement officer since 2005.


Schapiro needs “to get the staff rejuvenated,” says Thomas Gorman, an ex-SEC enforcement lawyer who now heads securities litigation at the firm Porter Wright Morris & Arthur. “I’d expect her initial focus to be on the Enforcement Division and getting it back out there as the cop on the beat.”


In the following excerpt, President-elect Barack Obama remarks on recent cabinet posts, including Mary Schapiro as Chairman of the SEC.

Over the past few weeks, I’ve announced key members of my economic team, who are now crafting a 21st Century Economic Recovery Plan that will create 2.5 million jobs. But as I said throughout the campaign, what will be just as important to our long-term economic stability is a 21st century regulatory framework to ensure that a crisis like this can never happen again.

Today, I am pleased to announce two individuals who will be leading that effort—Mary Schapiro as the Chairman of the Securities and Exchange Commission, and Gary Gensler as the Chairman of the Commodity Futures Trading Commission. I’m also pleased to announce that Dan Tarullo will be bringing his years of expertise on regulatory and banking reform to the Federal Reserve Board as one of its new governors.
In the last few days, the alleged scandal at Madoff Investment Securities has reminded us yet again of how badly reform is needed when it comes to the rules and regulations that govern our markets. Charities that invested in Madoff could end up losing savings on which millions depend—a massive fraud that was made possible in part because the regulators who were assigned to oversee Wall Street dropped the ball. And if the financial crisis has taught us anything, it’s that this failure of oversight and accountability doesn’t just harm the individuals involved, it has the potential to devastate our entire economy. That’s a failure we cannot afford.

Financial regulatory reform will be one of the top legislative priorities of my Administration, and as a symbol of how important I view this reform, I’m announcing these appointments months earlier than previous administrations have. These individuals will help put in place new, common-sense rules of the road that will protect investors, consumers, and our entire economy from fraud and manipulation by an irresponsible few. These rules will reward the industriousness and entrepreneurial spirit that’s always been the engine of our prosperity, and crack down on the culture of greed and scheming that has led us to this day of reckoning. Instead of allowing interests to put their thumbs on the economic scales and CEOs run off with excessive golden parachutes, we’ll ensure openness, accountability, and transparency in our markets so that people can trust the value of the financial product they’re buying. And instead of appointing people with disdain for regulation, I will ensure that our regulatory agencies are led by individuals who are ready and willing to enforce the law.

These are precisely the reasons why I chose the outstanding public servants who are with me today. Mary Schapiro currently serves as the Chief Executive Officer of the Financial Industry Regulatory Authority, the largest regulator for all securities firms that do business with the United States. Before that, she served as an SEC commissioner, and as Chairman of the Commodity Futures Trading Commission.

Mary is known as a regulator who’s both smart and tough – so much so that she’s been criticized by the same industry insiders who we need to get tough on. For years, she’s used her position to educate investors about market risks, warn seniors and employers about retirement scams, and call for increased regulation of mortgage brokers long before this housing crisis hit. I know that Mary will provide the new ideas, new reforms, and new spirit of accountability that the SEC desperately needs so that fraud like the Madoff scandal doesn’t happen again.


President-Elect Obama Remarks on Mary Schapiro’s Appointment (Dec. 18, 2008).

The next SEC chairwoman will also face the broader, challenge of navigating regulatory reform. The debate over how best to overhaul the U.S. financial regulatory system is far from settled, and is expected to be a top priority for Congress and Obama this spring.


“The SEC will have to find its sea legs in a new environment where a significant portion of its jurisdiction has been shifted over” to the Federal Reserve, says Michael Spafford, a partner at the law firm McKee-Nelson. He expects increased cooperation between the SEC and the Fed, and expects the SEC to lean on intermediaries such as clearing firms to provide more oversight over market players’ activities.

Another glaring question is whether Schapiro’s past experience running the CFTC means the Obama Administration will try to merge that agency into the SEC somehow. That idea is not new, but has gained more urgency in the last year and Cox has called for a merger multiple times. (Obama has named Gary Gensler, a Treasury Department official from the Clinton Administration, to head the CFTC.)

Doty says Schapiro’s appointment indicates that the Obama administration is “serious about finding way to combine the SEC and CFTC in a way that will make securities regulation more effective … It’s the first time the planets seem aligned” for a merger.

Khinda agrees. “We have a new administration that has an appetite for reform and an incoming SEC chair who understands both agencies and is more than capable of running them both and running them together,” he says.

Spafford, however, expects to see increased cooperation between the two agencies, rather than a merger. “The SEC already has lot on their plate,” he says. “A merger would be biting off a lot.” A merger would also probably require an act of Congress, something that always brings unpredictable results.

Almost everyone expects hedge fund regulation and regulation of the derivatives market to be a top priority for the next SEC chairwoman. “There’s a huge market of players—derivatives, hedge funds, credit default swaps, investment bank holding companies—over which nobody has any real regulatory hold,” Gorman says. “A big issue will be how to improve transparency in those areas.

Other rulemaking issues likely to loom large in 2009 include the use of International Financial Reporting Standards by U.S. companies, investor access to the proxy statement, and shareholder advisory votes on compensation.


David Mittelman, a securities lawyer at the firm Reed Smith, notes that in the current political and business climate, “any proposal perceived as deregulatory will receive skepticism.” As such, he says issues such as Expanded Regulation D private placement availability, foreign broker services, and international financial reporting convergence “all face a more difficult road in 2009.”

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