Posted by: Theo Francis on December 17
By tapping Mary Schapiro, who runs the financial industry’s own regulatory agency, to run the Securities and Exchange Commission, President-Elect Barack Obama may be sending a carefully modulated message to Wall Street: Shape up, but don’t panic.
It could also signal that the Obama administration wants to combine functions of the SEC and the Commodity Futures Trading Commission, which she headed from 1994 to 1996, and which oversees trading in options, futures and many other derivatives.
Moreover, Schapiro has experience turning around an agency rocked with scandal and, at the time, widely considered ineffectual. That could prove invaluable as questions swirl — some raised by the agency’s current chairman, Chris Cox — about how well the agency policed the financial industry in the run up to the financial crisis, and whether it missed red flags in the multi-billion-dollar dealings of alleged fraudster Bernard Madoff. (The union representing many SEC employees has fired back at Cox.) Several former SEC employees were cautiously optimistic about Schapiro’s nomination.
But, while Schapiro has won praise in many quarters — including at various times from consumer watchdogs, Republican and Democratic predecessors in the SEC’s top job, lawmakers and the financial-services industry — she’s not seen as someone likely to make Wall Street quake with fear. Given the anger of lawmakers, and the public, over the financial industry’s failures, that could prove significant.
“If you are looking for a firebrand, an activist, that’s not Mary Schapiro,” said one longtime SEC watcher. “I think she’ll be more of a caretaker than an aggressive enforcer.”
Today, Schapiro, 53, heads the Financial Industry Regulatory Authority, or FINRA, Wall Street's self-regulatory body, which regulates 5,000 brokerage firms and some 676,000 registered brokers. (FINRA, in turn, is overseen by the SEC.)
FINRA also runs the country's biggest non-court forum for resolving securities disputes, which handled nearly 5,000 arbitrations and 1,000 mediations a year. But arbitration, including at times FINRA's, has also come under intense fire from consumer groups, who say it often better serves corporations at the expense of individuals. The group has also received criticism for imposing fewer large fines in recent years.
Ronald Reagan appointed Schapiro to her first stint on the SEC, in 1988, and George H.W. Bush reappointed her in the following year. Bill Clinton kept her on, naming her acting chairman in 1993 before putting her in charge of the CFTC.
Schapiro took over as head of the regulatory arm of the National Association of Securities Dealers in 1996, after that organization was rocked by a price-fixing scandal. She is widely credited with revitalizing the agency's regulatory efforts, recruiting attorneys from the SEC and garnering respect from industry and consumer groups.
Before her tenure, the NASD's enforcement arm was "seen as more a nuisance than a threat -- it just bored you to death with a thousand little paper-cuts," says Columbia University law professor John Coffee. "It has become much more serious and much tougher in the last 10 years, and she does get credit for a lot of that."
Named chairman of NASD in 2006, she spearheaded the group's merger with the New York Stock Exchange's regulatory arm, creating FINRA. She has also served on the boards of Duke Energy (since 1999) and Kraft Foods (since 2001).
In a speech to a FINRA conference in late October, Schapiro gave a hint of the priorities she might pursue at the SEC.
She called for linking more closely regulation designed to protect investors from abusive practices and regulation designed to protect companies and the financial system from crisis. "These two problems -- insolvency and investor harm -- can develop a symbiotic relationship, in which each one contributes to the destructive tendencies of the other," Schapiro said. "We must create a regulatory system that gives equal weight to systemic risk and investor protection."
She also said the government should do more to regulate huge and interconnected financial institutions, but also do so more predictably. "I, for one, would be willing to make the trade-off of better capitalized, more closely supervised, but less profitable institutions for less volatility and less potential to imperil the entire financial system," she said.
In the same speech, she called for creating clearinghouses or exchanges to systematize trading in credit default swaps and complex derivatives. Schapiro also advocated simplifying the regulatory system protecting investors, noting that the same investor buying different kinds of stock-market-linked annuities could receive entirely different degrees of protection: some from their home state, some from FINRA.
"We cannot expect consumers to wade through a labyrinth of regulators or to decipher which product or service will afford the greatest protection," she said.
In comments a little over a year ago, by contrast, she lauded a more nuanced and cooperative flavor of regulation, even as she seemed to recognize the perils lurking behind the sub-prime housing crisis.
At a speech to a securities-industry gathering in Boca Raton in November 2007, as the subprime crisis was already unfolding, she presciently rattled off the risks the industry faced -- and which would ultimately contribute to this fall's crippling financial crisis: toxic mortgage-backed securities, liquidity crises that could harm financial firms, brokerage firms struggling with affiliated hedge funds.
FINRA had already "heightened our surveillance of several firms" with big exposure to mortgage- and asset-backed securities, and was targeting examinations on broker-dealers mired in sub-prime investments. "It remains to be seen" she noted, "how the macro economy will be affected by the fallout of what could be an ensuing credit crunch."
Securities firms should ask themselves, "do we have adequate controls to assess risk and act in a prudential manner," she said. "And it is a matter of course that the regulator will always ask that same question."
But she stopped short of setting new regulatory standards, and was careful to say she wasn't setting "implicit rules." Instead, she advocated "principals-based" regulation that leaves firms to decide how to conform to broader regulatory requirements.
That, in turn, "requires that the regulator recognize the difference between bad things happening in the face of otherwise prudential practices and the absence of sufficient prudential practices that lead to bad things," she told the gathering.
Washington Bureau Chief Jane Sasseen and other BusinessWeek writers cover the run-up to the Nov. 4 presidential election, paying close attention to how the candidates will handle issues such as housing, the economy, unemployment, and immigration.