President Barack Obama’s pick to fill the top spot at the Securities and Exchange Commission vowed to make reinvigorating enforcement at the agency her top priority if she is confirmed by the Senate.
“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,” Financial Industry Regulatory Authority chief executive Mary Schapiro told members of the Senate Banking Committee during her Jan. 15 confirmation hearing.
A veteran regulator who has served as an SEC commissioner and as chair of the Commodity Futures Trading Commission, Schapiro’s nomination to lead the Commission comes as the agency faces harsh criticism for regulatory failures during the worst financial crisis since the Great Depression.
Reed
“One of the first things I’ll do would 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.”
Most recently, the SEC’s failure, despite credible tips, for years to uncover the massive alleged fraud perpetrated by money manager Bernard Madoff has raised concerns about weaknesses in its inspection and enforcement functions.
As for FINRA’s role in failing to detect the Madoff scheme, Schapiro 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.”
Madoff
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, Schapiro said.
Schapiro said the bigger issue is an increasing migration of financial activity out of regulated broker-dealers—where there’s the SEC, FINRA, and other SRO and state involvement in regulation—to investment advisers, where there are far fewer resources available for inspection and oversight.
Schapiro
Schapiro also said it’s “essential” to reconstitute the SEC Office of Risk Assessment, which has “never really been fully staffed or equipped with the tools it needs.”
“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 told committee members.
She also vowed to “re-engage” the SEC with investors and to work to deepen its commitment to investor protection, transparency, accountability, and disclosure.
“I have never been afraid to go after people I thought violated the public trust.”
— Mary Schapiro,
Chief Executive,
Financial Industry Regulatory Authority
“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.
Asked by committee chairman Chris Dodd (D-Conn.) if she would take measures to “increase the effectiveness of broker-dealer examinations by FINRA and the SEC; improve the use of tips by the SEC staff; increase the quality of audit opinions rendered for non-public broker-dealers; and ensure impartial administration of the federal securities laws,” Schapiro replied, “I would explore and hope to move aggressively with respect to all of those.”
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.
She also echoed recent calls 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.
Lawmakers have yet to say what they plan to do with the SEC as they mull how to revamp U.S. financial regulation. Regardless of its structure in any future regulatory regime, Schapiro said its investor protection and other functions must continue to be fulfilled.
However, she noted that “a completely fresh look” is needed at how the SEC conducts examinations of all the entities it regulates …“to see if we really are understanding the business and how the business is changing.”
Meanwhile, she raised concerns about a current SEC rule proposal to transition U.S. companies to the International Financial Reporting Standards Board, now out for comment, and about IFRS generally and the independence of the board that sets the standards.
“They’re not as detailed as U.S. standards, there’s a lot left to interpretation,” she said. Even if adopted, she said there would still be a lack of consistency in how IFRS is implemented and enforced.
MOVING FORWARD
In the following excerpt, Mary Schapiro discusses her strategy as new head of the Securities and Exchange Commission:
We cannot underestimate the situation we are now in: the capital markets have collapsed; trillions of dollars of wealth have been lost; our economy is in recession; and investor confidence has been badly shaken. Middle-class families who were relying on that nest egg to pay to send a son or daughter to college or for a secure retirement now, don’t know where to turn.
There are many reasons for this crisis – and one of them is that our regulatory system has not kept pace with the markets and the needs of investors.
It is precisely during times like these that we need an SEC that is the investor’s advocate–that has the staff, the will and the resources necessary to move with great urgency to bring transparency and accountability to all corners of the marketplace, to vigorously prosecute those who have broken the law and cheated investors, and to modernize our country’s regulatory system to match the realities of today’s global, interdependent markets.
These urgent responsibilities would fill any agenda, but, Mr. Chairman, allow me to highlight a few of my top priorities.
First and foremost, if confirmed as Chairman, I will move aggressively to reinvigorate enforcement at the SEC. 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. As the first SEC Chairman, Joseph Kennedy, told the nation 75 years ago in explaining the agency’s role, “The Commission will make war without quarter on any who sell securities by fraud or misrepresentation.”
I look forward to working closely with you, Mr. Chairman, and the members of the Committee to ensure the SEC has the capability, to fulfill this critical mission–as well as to perform all of its other important duties.
Second, I want to re-engage the SEC with the people we serve, namely, investors. The investor community – from the largest pension fund to the family who has scrimped and saved in their 401(k) or 529 plan–needs to feel that they have someone on their side, that they can go to the SEC for advice, to seek redress, or to have their opinions heard.
Third, as I work to deepen the SEC’s commitment to investor protection, transparency, accountability, and disclosure, I also want to ensure these commitments are preserved in any regulatory overhaul that may be undertaken.
Indeed, as a member of the President’s Working Group on the Financial Markets, I hope I can offer its members, the Administration, and Congress both the benefits of my years as a regulator as well as the decades of experience the professionals at the SEC have in these areas.
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. I assure you that I will always keep their concerns front and center.
Seventy-five years after the SEC was founded, the Commission finds itself in a situation where, once again, it must play a critical role in reviving our markets, bolstering investor confidence, and rejuvenating our economy.
I am under no illusion that this will be an easy job. There is a lot of work to be done–quickly and diligently–in the months ahead. But I look forward to this challenge, to helping the millions of investors who rely on strong markets and a strong economy, and to working with the professionals at the SEC and the members of this Committee.
To be entrusted with leading the SEC at this moment, would be a great honor, and I am grateful for your consideration.
Source
Mary Schapiro Speaks on Her Agenda (Jan. 13, 2009).
Citing the cost to switch from U.S. GAAP to IFRS, she added, “This is a time when we have to think carefully about whether imposing those costs on the U.S. industry really makes sense.”
Schapiro noted that her greatest concern about IFRS is the independence of the International Accounting Standards Board.
“I’ll look at this entire area carefully and will not necessarily feel bound by the existing roadmap that’s out for comment,” she told lawmakers.
If confirmed, Schapiro said she’d also revisit the issue of proxy access. Noting that roughly 40 of the largest markets outside the U.S. allow shareholders of some size access to the proxy, she said, “It’s time for the U.S. to step into that club” with a “well-crafted, rational approach.”
She also cited concerns about the speed of changes to provide for mutual recognition and amendments to Rule 15(a) 6, which she said would allow foreign broker-dealers access to U.S. investors at “virtually a retail level” without the protections of the U.S. regulatory regime.
“We need to take a step back and look at whether we’re headed in the right direction,” she said. “We want to ensure investor protections are maximized…not compromised.”
Another issue raised by lawmakers as a result the Madoff scandal is whether there ought to be restrictions on SEC employees leaving the agency to work for the companies they regulate. Asked about her view on implementing such measures, Schapiro said any restrictions would need to be carefully weighed.
“I worry about the revolving door…I worry on the other hand about restriction that will make it impossible for people to come to commission in the first place,” she said.
Fair-value accounting and short selling would also be on her near-term agenda. Schapiro said she’ll study the recommendations of a recent SEC report on fair-value accounting to see if there are “further issues that should be addressed.” The Commission should also re-examine the entire area of short selling to see what restrictions are appropriate and whether the uptick rule, eliminated by the SEC in 2007, ought to be reinstituted.
Finally, Schapiro 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.”
Schapiro’s nomination must be confirmed by the full Senate.
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