Head the Securities and Exchange Commission, Mary Schapiro
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But now with the spotlight on, Schapiro is in the prickly position of having to defend her enforcement record. At her hearing, the soft-spoken Schapiro bristled at media reports that she "infrequently" pursued tough action against big Wall Street names, saying the stories painted an "unfair picture." While chief at FINRA, she countered, her team handled 15,000 enforcement cases, including big names like Morgan Stanley, Citigroup, Merrill-Lynch and Lehman. "I have never been afraid to go after people I thought who have violated the public trust."
But some do see a softer side.
"FINRA and other self-regulators historically have played it safe in their enforcement," says Columbia's Coffee. (Self-regulatory organizations do not usually draw their authority directly from Congress, and may be financed by the industry they cover.) "FINRA's been tougher than its predecessors, but it still tends to focus more on outlying and smaller firms; it's been more deferential to the bigger players. At SEC, she has to clean house and needs truly aggressive prosecutors." (See who's to blame for the current financial crisis.)
In all fairness, Coffee says, Cox and his enforcement officers "were hobbled by commissioners" who wanted pre-approval before SEC enforcement officers could seek penalties. "Nobody wants to get fired for being too aggressive in their investigations," he says. "The agency is demoralized and this could explain the Madoff case."
Former SEC enforcer Carton also sees this 2006 "Pre-Authorization" policy as being deadly for enforcement morale. "It put a complete chill on enforcement," Carton says. His "Day One" advice for Schapiro: kill this program.
Schapiro apparently agrees. In her hearing, she said the SEC pre-approval program was among the first things she would examine.
The chill that came with this program may have turned to a deep freeze in regard to Madoff. The same year the pre-authorization policy was enacted, SEC examiners gave Madoff's organization, after registering as an investment adviser, a clean bill of health. Just months earlier hedge fund whistle-blower Harry Markopoulos had given SEC enforcement officials 29 red flags about Madoff's $50 billion fund, presciently calling it the world's biggest Ponzi scheme. Nobody cared. (See pictures of the demise of Bernard Madoff.)
As for having the tools to stop new Madoffs, Schapiro at her hearing said, "One has to conclude that the [SEC's] tools were not up to the task." She added that the agency may "need a significant bolstering." As for better hedge fund transparency and disclosure, she said, "corporate disclosure has to be complete and accessible; with hedge funds I would like to see disclosure."
Yet Schapiro's financial self-regulation background may not be enough. According to Dr. Fred Dunbar, senior vice president at NERA, an economic consulting firm, "banks are suppose to behave themselves under self-rule." During the Bush Administration this popular belief drifted over to the SEC, Dunbar says. "The feeling was, with the SEC, that with such self-enforcement they wouldn't have to step up their own enforcement. But the financial crisis has led to a re-examination of this theory, firms don't behave as one might think in theory."
NERA studies show SEC enforcement action settlements hit a three-year high in 2008, reaching 739 settlements, but the vast majority, 568, were for individuals for such things as insider trading. Company settlements declined to a total 171, the lowest since 2002.
Schapiro, according to Dunbar, is not a deregulator and "does have a good reputation as an enforcer." He says, "she'll see where enforcement is needed and add it."
"We need more traditional enforcement," says Dunbar. "With big funds and banks, the government, in effect, becomes the back-up insurance if they go bad. Firms that grow too big to fail must pay for this insurance; this might achieve a kind of new self regulation." (See the top 10 financial collapses of 2008.)
More enforcement. Check. More Disclosure. Check. Better self-regulation. Check. Does Schapiro believe this is enough?
When Virginia's Democratic Senator Mark Warner asked the SEC nominee if "we needed prohibition of some financial instruments?, she answered cautiously: "We will explore prohibiting some instruments." She added that one big problem was turf wars among regulatory agencies. "Regulators need to cooperate," she said. "We haven't shared in past, we need a maximum number of eyes" to stop fraud.
The incoming chairwoman also said she believes strongly in the need for a broad investor literacy program, where local SEC offices work with local groups to get the word out about safe and unsafe investments.
Richard Wallace knows something about Schapiro and believes she will take bold action. Wallace worked at Schapiro's FINRA for the last 12 years, and before that was an enforcement prosecutor at the SEC. Wallace is now partner at the law firm Foley & Lardner, chief counsel of its financial industry regulatory authority practice. "Within a few months of coming on board at FINRA, Mary brought charges against Banker's Trust Securities," Wallace says. "She jumped right in, she beefed up enforcement, and wasn't afraid at all to take on powerful interests. She was an enforcement officer once, and enforcement officers are motivated by bringing big cases, they want to show they can go toe to toe with the biggest law firms companies can hire. She'll bring this feeling back to the SEC."
But her greatest skill, Wallace says, is her ability to improve things internally. "She's a real expert at improving morale," he says. "She'll be good at digging in at this, she talk to the staff about the SEC being a great institution with a proud tradition. She understands what moves people, you'll see a big change in this area."
To makeover the SEC, she'll need all of those skills and more.