Schapiro’s SEC Gets Cautious Early Thumbs-Up

May 6, 2009
By Evan Weinberger
LAW 360

Law360, New York (May 06, 2009) — When President Obama tapped Mary L. Schapiro to head the U.S. Securities and Exchange Commission, her mandate was simple. All she had to do was rebuild public trust after the commission failed to turn up a 25-year, $65 billion Ponzi scheme, rebuild the morale of a beaten-down agency and rewire a collapsed financial regulatory system.

And those were just the issues on the front burner when Schapiro was officially sworn in Jan. 27. Now that she’s had three months on the job — far too soon for any major regulatory reform to have taken place — Law360 asks the question: How is she doing?

“She has a lot on her plate,” said Fiona A. Philip, a partner at Howrey LLP and a former high-ranking SEC official. “She’s come in with a lot of energy and enthusiasm, and she has a receptive audience on Capitol Hill.”

The most important task Schapiro had to tackle on taking the job was boosting investor confidence, Philip said. On that front, Schapiro has scored fairly well, the former SEC attorney said.

But “you still have a long way to go,” Philip cautioned.

“The public perception of the SEC is better,” added Richard Marshall, a partner at Ropes & Gray LLP and a former associate regional administrator in the SEC’s New York office, among other positions at the commission.

One way to boost investor confidence is to beef up enforcement.

Early on, Schapiro reversed a policy requiring approval of any settlements by the full commission and ended a two-year pilot program requiring enforcement attorneys to get approval from commissioners before negotiating fines and other penalties with companies accused of securities violations.

At her confirmation hearings, Schapiro said she intended to take the handcuffs off of the SEC’s enforcement staff.

Schapiro has started to do just that, according to John Coffee, a law professor at Columbia University. “We have seen some increasing toughness on pure enforcement,” he said.

Coffee pointed to cases brought Tuesday against Reserve Management Co. Inc. and its two top executives, Bruce Bent Sr. and Bruce Bent III, and the first-ever insider trading case focused on credit default swaps as examples of increasing backbone at the commission.

The two cases also marked a significant speeding up of the enforcement process, something that indicated that the SEC under Schapiro will allow its investigators and prosecutors to take on their natural posture, Marshall said.

“It’s a sign that they’re going to be aggressive,” he said. “They’re also far more effective in their enforcement program when they move quickly.”

That view is not universally held, however. Investigations still take too long, Steven Toskes of Klayman & Toskes PA said.

“I guess where I stand, we just haven’t seen any results on broker-dealers related to customer disputes,” Toskes said. “We always are bothered by how slow the wheels turn.”

Klayman & Toskes represents investors in arbitration before the Financial Industry Regulatory Authority, the self-regulatory organization Schapiro led prior to taking the reins at the SEC.

So far there haven’t been many changes on the ground as far as how cases are processed in regional cases, said Jim Sanders, a former chief of the SEC regional office in Los Angeles.

“No one has seen a big change as to how cases are handled so far,” said Sanders, who is now a partner with McDermott Will & Emery LLP.

There has also been talk about a possible reorganization of the SEC’s Enforcement Division, but so far it’s too early to tell whether that will happen, he said.

It’s too early to tell was the general assessment of Schapiro’s regulatory reform proposals as well.

“You wouldn’t expect in the first 100 days a whole bunch of new rules,” Marshall said.

Nonetheless, the proposals have been coming.

Schapiro has called for more robust regulation of hedge funds, investment advisers and money market funds. On Tuesday, she led a roundtable to discuss ideas on reining in short-selling.

“The regulatory agenda is still too preliminary to evaluate, but she’s indicated that she’s willing to take on some tough issues that have been around for a while,” Marshall said.

In the run-up to her confirmation, critics accused Schapiro of being too close to the financial industry from her days of running FINRA.

The SRO did not detect Madoff’s fraud, nor did it publicly note a problem with auction rate securities, which went bust as part of the wider credit collapse, they said.

FINRA’s arbitration process was tilted too far toward broker-dealers and other institutions and against private investors, some advocates said.

On the regulatory front, Schapiro is not going far enough, though, Coffee said. Schapiro’s main pushes are for more disclosure, including surprise audits, on investment advisers, as well as new requirements on ratings agencies, he said.

But the Ponzi scheme perpetrated by Madoff, and the credit ratings agencies’ inability to spot toxic mortgage-backed securities, may require more, Coffee said.

“I do think that in some areas, like Madoff and the credit ratings agencies, the response should go beyond just requiring increased disclosure,” he said.

The SEC should make it mandatory for investment advisers to store clients’ money at independent custodian banks, which would provide a bulwark against fraud, Coffee said, noting that Madoff served as his own custodian.

And with the ratings agencies, any reforms should include some base performance requirements as well as exposure liabilities, he said.

Much like Obama, Schapiro has a reputation for trying to find compromise. “She’s much more of a person who has been in the industry and is a consensus builder,” Coffee said.

One area where Schapiro has gotten high marks is picking up the morale of the agency’s staff.

“I think people are very, very happy that Mary Schapiro is chairman of the SEC,” said Sanders, who worked at the regulator when Schapiro was a commissioner. “She’s somebody who’s not coming in from the outside with no background at the SEC. But at the same time, she’s been willing to make changes.”

The atmosphere is night and day from Christopher Cox’s tenure, Marshall said, noting the former chairman’s initial reaction to the Madoff fraud, which was to blame agency staff members.

Also, the Senate’s recent $20 million bump in enforcement financing has had a lot to do with boosting morale, Philip said.

Moving forward, one danger facing Schapiro is the potential for fighting the last battle rather than attacking new problems, she said.

The SEC’s renewed focus on Ponzi schemes is one example, she said, expressing concern that other enforcement cases will not get the same attention.

Global coordination of financial regulation is the biggest pitfall awaiting Schapiro, Marshall said.

“Lots of people can identify areas where there’s perceived to be a need for changes in regulation, but the international aspect of the problem makes it very difficult to act,” he said.

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