It's official: Mary Schapiro will be stepping down this month after nearly four years as chairman of the Securities and Exchange Commission. Taking her place, at least for now, will be current SEC commissioner, Elisse Walter, who will take the reins on Dec. 14.
Walter will have her hands full, wrestling with such issues as the Volcker rule, high-speed trading, the future of international accounting rules, expanded disclosure in the municipal bond market, legal challenges to Dodd-Frank Act provisions, and plenty more.
If you liked the direction the SEC was heading under Schapiro, you'll probably feel the same about the agency under Walter. Critics of the Commission will likely continue to find much to grouse about. Since the Senate already confirmed Walter as a commissioner, she will not need to be reconfirmed as chairman, easing the transition.
Former SEC enforcement staffers vouch both for Walter's character and as someone who is well-prepared for the role. “The thing about Commissioner Walter is that she is really well-respected inside the building,” says Robert Kaplan, a partner with law firm Debevoise & Plimpton and former co-chief of the asset management unit of the SEC's Enforcement Division.
Russ Ryan, a partner with law firm King & Spalding and formerly an assistant director in the SEC's Enforcement Division, agrees. “People know her and respect her both in the building and amongst the regulated community, which is always a positive thing for a chairman,” he says. “She's a known commodity among the staff and among the industry.”
Walter is a long-time presence in the halls of the SEC, with stints at the agency going back to 1977. She has served as an SEC Commissioner since July 2008, and has worked in the Division of Corporation Finance and Office of the General Counsel. She was also general counsel of the Commodity Futures Trading Commission when Schapiro led that agency in the mid-1990s.
Despite long stints at the SEC and the CFTC, Walter is not a career bureaucrat. She served as senior executive vice president for regulatory policy and programs at the Financial Industry Regulatory Authority, the securities industry's self-regulatory body. Walter's FINRA background “gives her a lot of depth in regulated entities,” says Kaplan.
SEC watchers expect Walter to hew closely to the positions held by Schapiro and to champion similar initiatives. “She has been a close ally of Chairman Schapiro, and I do think they see eye-to-eye on most issues, so I wouldn't expect a tremendous change in the agency's priorities or approach, at least not in the near term,” says Ryan.
One of the areas where many expect Walter to continue to focus is that of enforcement. Under Schapiro's leadership, the SEC brought a record number of enforcement actions—735 in fiscal year 2011—and a near-record 734 actions in fiscal year 2012. Walter will “continue to move the commission in the direction of more aggressive enforcement,” says Ryan. He expects the SEC to continue to focus its enforcement efforts on investment advisers, financial fraud, and insider trading.
Indeed, enforcement volume could actually increase under Walter, as the Whistleblower Office, opened in 2010, gets up to speed. Eugene Goldman, a partner with McDermott, Will & Emery and formerly senior counsel in the SEC's Enforcement Division, says he also expects to see “a number of enforcement actions” directly resulting from the SEC whistleblower program. "These would include actions alleging financial and accounting fraud, which often are spurred by information from an insider," says Goldman. Thus far, the whistleblower program has generated more than 3,000 tips, according to the SEC.
Given the gap in time between the evaluation of allegations and any resulting enforcement actions, you'll really start to the see the fruits of its labor in 2013, says Goldman. “There will be a number of whistleblower awards, so that certainly will be part of the enforcement mix,” he says.
“[Walter] has been a close ally of Chairman Schapiro, and I do think they see eye-to-eye on most issues, so I wouldn't expect a tremendous change in the agency's priorities or approach, at least not in the near term.”
—Russ Ryan,
Partner,
King & Spalding
Under Schapiro's leadership, too, the SEC filed actions against 129 individuals and institutions stemming from the financial crisis, including more than 50 CEOs, CFOs, and other senior officers. As chairman, Walter will continue to hold financial professionals to “a very high standard,” says Kaplan. “I think she'll be very tough in her view of what the appropriate remedies will be against financial professionals who engage in misconduct,” he says.
What distinguishes Walter from any other SEC commissioner when it comes to the agency's enforcement priorities is that “she's been probably the most visible member of the Commission in the area of international outreach,” adds Ryan.
In May, during a speech before the Financial Accounting Foundation's annual board of trustees, Walter spoke about the importance of coordination and cooperation among global regulators. “Maintaining the competitiveness of our markets is not, in my view, a reason to dilute standards or fail to take enforcement or regulatory action,” she said. “However, it does mean that, more today than ever before, it is critical for us to build bridges among nations by enhancing cooperation among regulators.”
SCHAPIRO'S TRIUMPHS
Below is an excerpt from the Securities and Exchange Commission's review of its enforcement division's accomplishments under the leadership of former Chairman Mary Schapiro.
Reforming and Revitalizing the SEC—During Chairman Schapiro's tenure, the agency:
Streamlined its enforcement procedures to launch investigations more quickly
Developed its first national, centralized database for all tips and complaints and established an office to triage them
Created specialized enforcement units to harness expertise and experience
Eliminated a layer of management to put more expert attorneys back on the front lines
Modernized its technology and upgraded its case management system
Established a new whistleblower program already paying dividends
Established a new division to focus on risk and economic analysis
Created new corporate disclosure units
Bolstered its ranks by hiring more experts in risk management, quantitative analytics, trading, portfolio management, valuation skills—and stepped-up training
Enhanced collaboration by creating cross-agency working groups and making it a criteria for performance evaluations
Created the agency's first-ever Office of the Chief Operating Officer
Improved the agency's financial reporting, eliminating material weaknesses
Achieved Record Results in Enforcement and Inspections
Brought a record number of enforcement actions—including 735 enforcement actions in FY 2011—and a near-record 734 actions in FY 2012
Returned more than $6 billion since FY 2009 to harmed investors
Obtained more than $11 billion in ordered disgorgements and penalties since FY2009
Brought an increased average of 50 Ponzi scheme cases each year between FY 2009 and 2012— more than twice as many as compared to FY 2007 and 2008
Filed actions against 129 individuals and institutions stemming from the financial crisis, including more than 50 CEOs, CFOs, and other senior officers
Brought financial-crisis related actions against Fannie Mae and Freddie Mac, State Street, American Home Mortgage, New Century, IndyMac, Bancorp, Countrywide, Brookstreet, Citigroup, Wachovia Capital Markets, Goldman Sachs, Evergreen, J.P. Morgan Securities, Bank of America, Charles Schwab, Morgan Keegan, TD Ameritrade, and others
Brought a record number of enforcement actions against investment advisers
Increased the amount of enforcement actions involving municipal securities
Introduced new tools, similar to those used by criminal authorities, to secure the cooperation of persons who are on the “inside”
Prosecuted the largest insider-trading scheme ever discovered, winning a record $92.8 million fine in the civil case against the CEO of the Galleon Hedge Fund
Witnessed gains from a new Aberrational Performance Inquiry focused on hedge funds
Embraced a risk-based approach targeting examinations of registered firms, bringing a 50 percent increase in the rate at which exams result in referrals to the enforcement division
Imposed first-ever penalty against an exchange for rule violations
Launched an initiative to address concerns arising from reverse mergers and foreign issuers
Source: SEC.
Added Walter: “A close network of regulators provides better oversight of advanced and integrated markets that, in turn, facilitates efficiencies and growth in capital-raising, and, most important to me, investor protection and market integrity.”
Walter's role as the Commission's sole representative on two major international bodies—the International Organization of Securities Commissions and the Financial Stability Board—provides “a window into some of her interests that may translate into Commission initiatives if her tenure extends beyond a few months,” says Ryan.
“We have seen, and will continue to see, tremendous cooperation among regulators around the world in terms of collecting and sharing information. The information collection doesn't stop at the border where the suspected fraud is taking place,” says Goldman. “In effect, via the use of bilateral and multilateral agreements, you're seeing a maturing global enforcement landscape.”
Other Matters
In addition to enforcement priorities, Walter has been an especially vocal proponent of enhancing disclosure in the $4 trillion municipal securities market. In 2010, she led an agency-wide effort to examine the municipal bond industry, culminating in an extensive report released in July 2012.
The report offered such recommendations as granting the SEC authority to set disclosure standards for the industry and require municipal issuers to have audited financial statements.
“Too many investors aren't getting the answers they need, even to their most basic questions,” Walter said during a speech in October. “At the same time, I hear that many municipal issuers are reluctant to voluntarily alter disclosure practices because advisers warn of potential legal risk, which may or may not be true. These are areas that I believe the SEC must address.”
The unique challenge faced by Walter is that “she's really a lame duck,” says Tom Gorman, a former SEC senior counsel in the enforcement division who's now a partner in the law firm Dorsey & Whitney. “It's clear she's not going to be chairman for more than a year, at maximum, which makes it hard to lay out a long-term agenda.”
The other challenge: Until the SEC has in place a permanent successor for Schapiro, passing any new regulations could prove to be a significant challenge. As it stands right now, the SEC consists of an even split between two Democrats and two Republicans, historically resulting in gridlock when it comes to settling any controversial issue. “The sooner the president appoints a permanent SEC chairman, the better for the agency, because it will better be able to lay out its agenda and start moving on some of the more controversial and difficult issues,” says Gorman.
If it so happens that Walter is that permanent successor, don't expect her to remain standing in the shadows of Schapiro for very long. “Every new chairman hopes to leave their mark on the agency,” says Ryan, “and I think you'll see her develop her own priorities, and she'll make an impact that defines her own chairmanship.”
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