Tuesday, December 30, 2008


President-elect Barack Obama‘s choice of Mary Schapiro to head the embattled Securities and Exchange Commission is historic for many reasons.

In a presidency that will begin with many firsts, Ms. Schapiro, if confirmed, will be the first full-time female chairman of the agency created to be the watchdog of Wall Street. Although the SEC has previously had women serving as acting chairmen between vacancies - Laura Unger early in George W. Bush’s administration and Ms. Schapiro herself early in Bill Clinton’s administration - this would be the first actual nomination and Senate confirmation of a woman to lead the agency.

The other reasons Ms. Schapiro’s tenure is guaranteed to be historic are, of course, the issues of the news headlines. From failing investment banks to Bernard Madoff’s alleged $50 billion Ponzi scheme, the SEC has been under fire for ineffective regulation of the areas it is supposed to police.

In this political environment, the temptation for any president-elect would be to appoint a populist crusader promising the magic elixir of more regulation. Indeed, during the campaign, GOP presidential candidate John McCain shamelessly pandered by telling “60 Minutes” he would appoint Andrew Cuomo, New York’s camera-friendly Democratic attorney general, to the job. Compared to Mr. Cuomo as well as many of the choices bandied about in Democratic circles for the SEC chairman, Mr. Obama’s selection of Ms. Schapiro is reasoned and thoughtful. No doubt her policies at the agency will be influenced by the priorities of the Obama administration and liberal leaders in Congress. But Ms. Schapiro has shown in her tenure as an independent SEC commissioner during the presidencies of Ronald Reagan and George H.W. Bush, as well as in her current leadership of the quasi-governmental regulatory arm of Nasdaq and the New York Stock Exchange, that she recognizes that some regulations have costs that outweigh their benefits.

In her current post, for instance, Ms. Schapiro has spearheaded initiatives to fight fraud and increase disclosure in the marketing of investment products for seniors. Yet she also cautioned, in a speech in June, against limiting choices of products that “can have legitimate value for some investors” through overly strict rules.

And she has recognized that costly regulation can harm the competitiveness of the U.S. economy. “It is imperative to the health of markets, and therefore in the interests of investors, that we do not regulate to a point of unnecessary competitive disadvantage in this country,” Ms. Schapiro said in a 2006 speech.

Notably, at the press conference in which Mr. Obama announced her selection, Ms. Schapiro promised better - but not necessarily more - financial regulation. “The only way to restore the trust that has been lost is through effective, thoughtful reform of our regulatory structure and the consistent and robust enforcement of our financial regulations,” she said from the podium.

The distinction between more and better regulation is an important one because contrary to press accounts, the past few years have hardly been an era of SEC deregulation. Rather, it has been a time when the agency and the nation’s lawmakers have gone after flies with sledgehammers - and elephants, like Mr. Madoff, with fly swatters.

While Mr. Madoff had free reign to allegedly scam his investors of billions, the Sarbanes-Oxley Act of 2002, enacted after the Enron and WorldCom bankruptcies, showered public companies with billions in costs and thousands of manhours in documenting so-called “internal controls” that are often just accounting minutiae. Due to the Sarbox mandates, accountants have been probing trivial matters that have little to do with accurate financial statements such as, in some reported cases, who has the office keys and how many letters are in employee passwords.

Sarbox’s costs have been prohibitive to smaller companies and have kept many firms from going public. Home Depot co-founder Bernie Marcus told Investor’s Business Daily that his firm could not have become a public company in the early ‘80s had Sarbox been in effect. And going public in the equity markets, especially when credit markets are so tight, is essential for today’s honest entrepreneurs to have the growth capital to build the next Home Depot or Microsoft Corp.

The SEC that Ms. Schapiro was a part of in the late ‘80s and early ‘90s, under the chairmanship of Richard Breeden, offers a model of regulation that she would do well to emulate. It cracked down on fraud in areas such as penny stocks and pushed through better disclosure of executive pay.

But the Breeden SEC also streamlined rules in policies such as Regulation S-B that reduced the paperwork for smaller firms in going public. As a result, initial public offerings of stock actually increased during the early ‘90s recession, helping the economy to recover more quickly.

If Ms. Schapiro and her bosses in the Obama administration recognize that the interests of honest entrepreneurs and investors are not in conflict, and that burdensome rules on public companies deprive investors of opportunities as well, the recovery from our current economic doldrums could be much quicker as well.

John Berlau is director of the Center for Investors and Entrepreneurs at the Competitive Enterprise Institute.

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