Risk & Compliance

Mary Schapiro Vows to Be Tough Enforcer

At Senate hearings on her nomination as SEC chief, she says she'd immediately attack problems in the U.S. regulatory system and "reinvigorate" the ...
Sarah JohnsonJanuary 15, 2009

President-elect Barack Obama’s choice to chair the Securities and Exchange Commission, Mary Schapiro, used her Senate confirmation hearing today to deflect critics who accuse her of being soft on enforcement during her tenure as head of the Financial Industry Regulatory Authority.

“I have never been afraid to go after people I thought had violated the public trust,” she said, adding that FINRA pushed through 15,000 enforcement cases on her watch. Her statement came after Senate Banking Committee members lightly probed Schapiro during two hours of questioning, noting that FINRA is one of the regulators blamed for failing to uncover Bernard Madoff’s alleged $50-billion Ponzi-style fraud.

In FINRA’s defense, Schapiro said U.S. regulators’ “stovepipe” system does not encourage communication between agencies — something she hopes to change if confirmed. Calling the Madoff scandal “a tragedy,” she said that the SEC did not share any tips about the investment manager with FINRA, and that her agency’s purview was limited to the broker/dealer side of the business, which had clean books and records, as opposed to the books at his investment advisory business. If confirmed, Schapiro said, she would spend her first few weeks in office working on centralizing tips and whistleblower complaints that come into the SEC.

Schapiro also vowed during the hearing to slow down some of her predecessor’s pet projects, such as following a timeline for transitioning all U.S. publicly traded companies to global accounting rules by 2016. Rather, she said she would immediately focus on fixing the regulatory holes that contributed to the credit crisis.

Without naming chairman Christopher Cox, Schapiro said the commission’s current enforcement policies have “handcuffed” the division. Under Cox, the SEC’s lawyers are required to get the commissioners’ approval before negotiating penalty terms with companies — an approach that critics say has led to low or negligible fines.

At the hearing, senators simultaneously placed a large amount of blame on the SEC for the current state of the U.S. economy, and acknowledged that Shapiro won’t be able to fix all the problems herself. “The Securities and Exchange Commission has broken down, and it’s unclear if it needs gas or a whole new engine,” said Sen. Robert Menendez, a New Jersey Democrat.

The senators noted the public criticism that has nagged Schapiro in recent weeks, including publicity about two lawsuits that accused her of making misstatements in the time before FINRA was formed from the merger of the National Association of Securities Dealers and NYSE Member Regulation. They did not ask her any specifics about the cases, which she said have “no merit.”

Giving support to Schapiro’s confirmation, Menendez said that no one on the committee doubts her ability to take over as chairman. But said that he and other senators have reservations about whether she can be a “robust” enforcer. Schapiro has spent the past 20 years in leadership roles among various regulatory bodies, including as an SEC commissioner and, briefly in 1993, as the watchdog’s acting chairman. At FINRA, a non-government regulator, she oversees the 5,000 securities firms that do business with the U.S. public.

With her husband and two daughters sitting behind her, Schapiro answered senators’ questions with an aura of confidence. “I have no illusion this will be an easy job,” she said after listing her top priorities. These entail efforts to “reinvigorate” the SEC enforcement division, which may include asking for more resources from Congress; getting more input from investors; and helping modernize the U.S. regulatory system. That last goal may involve merging the SEC with another agency, such as the Commodity Futures Trading Commission, which she once chaired. Or her approach could even involve doing away with the SEC, and spreading its responsibilities among several other regulators.

She also promised to consider ways to reform the credit-rating-agency industry, which lawmakers have attacked as rife with conflicts of interest, making its ratings hard to believe. She said she was open to the idea of creating an organization similar to the Public Company Accounting Oversight Board, which oversees audit firms, and letting the new agency monitor the rating agencies.

On other issues, she plans to back off on some of Cox’s plans, namely the proposed roadmap for converting companies to international financial reporting standards. She has concerns about the pace of the timeline, the independence of the overseas standard-setter, and the quality of the rules themselves. Considered more principles-based than U.S. GAAP, IFRS standards are not as detailed, and allow more room for interpretation, she said. She is also worried about what the conversation might cost companies, noting that the SEC estimates that the price tag could run as high as $32 million for the largest firms adopting IFRS. “I will not be bound by the existing roadmap that’s out for public comment,” she said.

She appeared less familiar with the debate over fair-value accounting. While she has read the recently released congressionally mandated report on the rules put out by the SEC, she said, she has yet to study it in detail, and plans to “immerse” herself in the topic soon after she takes office.

Moreover, Schapiro revealed that she is in favor of federal oversight of insurance companies, and requiring hedge funds to register with the SEC. And she may also grant investors proxy access, a topic that has divided commissioners in the past.