- The Washington Times - Friday, January 16, 2009

President elect-Barack Obama’s choice to head the Securities and Exchange Commission promised Thursday to revitalize the embattled agency’s enforcement efforts and bring other changes to bolster investor protection.

With investor confidence shaken in the financial crisis, Mary L. Schapiro said the SEC must be given the resources it needs to investigate and pursue “those who cut corners, cheat investors and break the law.”

Ms. Schapiro also pledged at her Senate confirmation hearing to “re-engage” the SEC with investors, and to deepen the agency’s commitment to investor protection, transparency and accountability.

She is chief executive of the Financial Industry Regulatory Authority, the securities industry’s primary self-policing organization, and has extensive experience as a government regulator in Washington.

Mr. Obama named Ms. Schapiro as the next SEC chairman at a time when the agency is being called on to help restore investor confidence shattered by the worst financial crisis in more than 70 years. The SEC also has faced heavy criticism for its failure to discover the $50 billion Ponzi scheme purportedly run by money manager Bernard Madoff — despite credible allegations against him brought to the agency over the course of a decade.

Members of the Senate Banking, Housing and Urban Affairs Committee assailed the SEC, saying it contributed to the crisis with lax oversight of Wall Street and the financial markets, while calling for a thorough shake-up of the agency and its methods for detecting fraud.

“We need a much stronger regulator than we have had in the recent past,” said Sen. Charles E. Schumer, New York Democrat. “The only way the SEC is going to find crooks is if it’s actively looking for them.”

Ms. Schapiro said she would create a new centralized process within the SEC for improving communication among staff members and taking in tips regarding fraudulent activity so vital information doesn’t slip through the cracks. And she pledged to improve the effectiveness of the agency’s process for inspecting brokerages, investment firms and other entities.

Complex instruments that are growing explosively and mostly unregulated, such as hedge funds and credit default swaps, “need to come under the regulatory umbrella,” Ms. Schapiro said. “We have to fill the gaps.”

Committee Chairman Sen. Christopher J. Dodd, Connecticut Democrat, asked Ms. Schapiro about the failure of FINRA, the organization she leads, to detect the purported $50 billion Madoff fraud in its inspections of his brokerage operation.

Because the reported fraud was carried out through Mr. Madoff’s investment business, and FINRA was empowered to inspect only the brokerage operation, it wasn’t possible for her organization to discover the violations, Ms. Schapiro said.

A primary lesson from the Madoff case is the “stovepipe approach” that governs financial regulation, in which various regulatory agencies and government authorities oversee different parts of the market and sometimes compete with each other, doesn’t work, Ms. Schapiro said.

Mr. Obama’s selection of Ms. Schapiro last month met with mixed reaction from consumer and investor advocates. Some said her position within Wall Street’s regulatory apparatus made her less suitable than an outsider who would shake things up when change is sorely needed.

Noting the criticism, Sen. Robert Menendez, New Jersey Democrat, asked Ms. Schapiro whether she is a “safe and predictable” regulator.

“I’m absolutely ready to take this on,” Ms. Schapiro said, pledging to maintain “a laserlike focus on fraud and investor protection.”

Asked about litigation against her and FINRA, Ms. Schapiro called it “frivolous” and without merit. She has been sued by a group of brokerage firms contending she made misleading statements in a bid to push through a 2007 merger of FINRA’s predecessor, the National Association of Securities Dealers, with elements of the oversight operations of the New York Stock Exchange.

Ms. Schapiro and other senior executives of FINRA received pay increases after the merger, and the brokerages’ two lawsuits contend she made misstatements - including that the Internal Revenue Service had barred the NASD from paying each member firm more than the $35,000 they received in the merger.


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