Regulatory Report Card: How Effective Was Mary Schapiro as SEC Chair?

From: Time

By Christopher Matthews

SEC Chairman Mary Schapiro announced  yesterday that she would be stepping down from her role in December, marking  the end of one of the most eventful four-year periods in the  SEC’s history.

When she assumed the Chairmanship of the SEC in January of 2009, the  reputation of America’s financial regulatory apparatus was at its  nadir. For more than a decade, regulators had failed to react to a growing  real estate bubble, the bursting of which precipitated the worst financial  crisis the country had seen in generations. Then, in December 2008, Bernie  Madoff was arrested and charged with criminal securities fraud related to a  decades-old ponzi scheme that he had operated right under the noses of the SEC,  the most powerful and prominent securities regulator in the country. Meanwhile,  large financial institutions were being bailed out with taxpayer money because  the regulatory system had failed to require those firms to hold enough rainy-day  capital.

Schapiro, in other words, came to Washington  needing to not only help guide the country through the financial crisis, but  justify the SEC’s very existence in light of its past failures.

Indeed, Schapiro’s central victory as SEC Chair may be that she protected her  organization’s role in the regulatory process during the Dodd-Frank overhaul.  The SEC’s reputation was damaged by the Madoff affair in particular, given that  whistleblowers had repeatedly  warned the regulator about the ponzi scheme over several years before  Madoff’s machinations were finally exposed. As Huffington  Post’s Mark Gongloff writes:

“Before Schapiro took office, there was talk in Washington that maybe the  SEC, which had completely failed to notice Bernie Madoff openly ripping people  off for years, should be abolished. Schapiro helped end that talk by  showing that the agency could occasionally still take stabs at setting rules and  enforcing laws on Wall Street.”

The SEC did emerge from the Dodd-Frank regulatory overhaul with its power  mostly in tact. But if the successful waging of a regulatory turf war is one of  Schapiro’s primary successes, that’s not much to write home about. After all,  before Schapiro got the role of SEC chair, she was CEO of FINRA, the  self-regulatory organization to which the SEC delegates much of its  responsibility. FINRA and its predecessor organization, the NASD, did nothing to  clamp down on the Madoff fraud during her years there. So the better  question is whether Schapiro learned lessons from decades of failed regulation  and was able to overhaul the culture that overlooked a $50 billion ponzi  scheme.

(MORE: High-Frequency  Trading: Wall Street’s Doomsday Machine?)

The record here is mixed and difficult to evaluate. The SEC, anticipating her  departure, recently  released a list of Schapiro’s accomplishments as Chairman. Among them are  that the SEC brought a record number of enforcement actions — 735 in 2011 and  734 in 2012. In addition, the SEC says  that it has brought 129 separate enforcement actions against  individuals and entities whose actions directly led to the financial crisis, and  that these fines totaled $2.6 billion.

Critics like Firedoglake’s David Dayen argue  that bringing a record number of regulatory actions following a financial crisis  marked by so much fraud should be a matter of course, not an accomplishment.  Dayen also criticizes the SEC’s general approach to enforcement  actions under Schapiro:

“In the aftermath of the financial crisis, which involved a high degree of  securities fraud, no major executive or Wall Street figure has gone to jail for  anything other than insider trading, mostly prosecuted out of the US Attorney’s  office in Manhattan. The SEC pioneered a settlement strategy on various bad  securities deals where they would pick one deal rather than make a platform case  about a general pattern of conduct by fraudulent Wall Street firms, and then  settle on that individual deal, allowing the securities issuer to neither have  to admit or deny wrongdoing. After that, the SEC would never go back to the  bank, as if they all only did one bad deal during the financial  crisis.”

In Shapiro’s defense, it’s worth pointing out that the SEC doesn’t have the  power to prosecute criminal acts — that responsibility lies with the Justice  Department. In addition, Schapiro has  petitioned Congress to  increase the maximum fines the regulator can impose on individuals and  firms per violation, a move that would bolster the SEC’s ability to deter future  violations. If Congress were willing to increase the maximum fines the SEC can  impose — and increase it’s paltry $1.3 billion budget — the SEC would surely be  more effective on the enforcement front.

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One widely recognized success during Schapiro’s tenure is the enforcement  division’s crack-down on insider trading. Schapiro and her enforcement chief  Robert Khuzami had several high-profile successes on this front, including  winning a $92.8 million fine in a case against Galleon hedge fund  CEO Raj Rajaratnam. The parallel criminal investigation led to an 11-year  prison sentence for Rajaratnam himself and to pleas or convictions for more than  fifty other members of the conspiracy. Since 2009, the SEC has brought more  insider trading cases than it did during any other three-year period in its  history.

In addition to bolstering the SEC’s enforcement mechanism, Schapiro oversaw  one of the most rapid periods of evolution of the nation’s financial markets in  generations. The 2010 Dodd-Frank financial reform law gave the SEC and other  regulators hundreds of new rules to implement, a process that was supposed to be  finished more than a year and half ago, but that isn’t even half complete.  Whether Mary Schaprio is to blame for the plodding pace  of implementation is up for debate. Lawmakers’ expectations  for rule making may have been too high given the complexity of the  undertaking.

But Schapiro had one clear and high-profile failure when it came  to implementing reform of the money market fund industry. The money  market fund industry played a big role in the 2008 financial crisis when the  Lehman Brothers bankruptcy triggered a run on these funds. In order to promote  financial stability, Schapiro hoped to require money market funds either to hold  more capital in reserve against losses, or for those funds to disclose their  share prices like mutual funds, which would make it more clear to investors that  money market funds are not guaranteed investments like bank deposits. But  Schapiro couldn’t muster the three commission votes necessary to move forward  with reform, and the fight to fix the problem has since moved the the Financial  Stability Oversight Council.

Another area where critics found Schapiro’s performance lacking is  high-frequency trading. The 2010  flash crash, the  bungled Facebook IPO, and the Knight  Capital Partners trading debacle earlier this year are all evidence of the  risks posed by an increasingly fragmented market dominated by computerized  traders. Schapiro has taken some measures to curb these risks, like the  implementation of so-called circuit breakers, which halt trading on stocks  showing movement that may be caused by glitches in high-frequency trading  software. In addition, this summer Schapiro  successfully implemented a  rule requiring exchanges to establish a market-wide audit trail that will  enable regulators to better monitor trading activity and understand the effects  high-frequency trading is having on the market.

But there are still many unanswered questions regarding high-frequency  trading like whether exchanges are giving unfair advantage to high-speed trading  firms in order to garner their lucrative business; and whether having a highly  fragmented stock market with many trading venues poses a systemic risk to the  financial system. It may be too much to expect Schapiro to have dealt completely  with this contentious issue in her one term as SEC Chair, but it is fair to say  that much more needs to be done to regulate this new and growing force in the  industry.

The most difficult part of judging any public official’s legacy is seperating  that which she is responsible for from that which is out of her control.  Dodd-Frank implimentation has been painfully slow, weighing the economy down  with regulatory uncertainty. But to what extent is this the fault of regulators  and to what extent the fault of law makers and lobbyists who made the law  needlessly convoluted? Can Mary Schapiro really be blamed for the fact that  three of her fellow commissioners refused to vote for money market fund reform?  These sorts of questions are unanswerable to anybody who wasn’t in on every  meeting, negotiation, and phone call of Schapiro’s since 2009. But looking  back on her record, despite her successes, one is struck by how much work there  is left to do.

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