The nation’s top market cop is looking for a few good snitches.
Securities and Exchange Commission Chairman Mary L. Schapiro told a congressional panel Wednesday that her agency is considering offering cash bounties for the first time to private-sector whistleblowers who help expose financial wrongdoing.
The plan was revealed as disgraced financier Bernard Madoff was preparing to plead guilty to 11 felony counts in a New York courtroom Thursday in connection with a massive Ponzi scheme that went undetected by the SEC and other regulators for more than a decade. Prosecutors this week raised their estimate of the size of the fraud to more than $64 billion.
Mrs. Schapiro told a House Appropriations subcommittee that she is considering asking for the power to offer rewards to whistleblowers in securities fraud cases similar to the bounties given to those who reveal insider-trading violations.
“Right now, the main reward for being a whistleblower is the good feeling you get of having done something important, because we don’t have the authority to pay,” she said, noting that the Internal Revenue Service and other federal agencies already have well-defined reward programs.
“Whistleblowers tend to do a lot of the work for you, hand you something that’s pretty fully baked,” Mrs. Schapiro said. “It would enable us to run with that kind of information and pursue cases in a much more aggressive way.”
Noting that the SEC has about 400 investigators to monitor more than 11,000 investment advisers like Mr. Madoff, she said, “We have to leverage third parties to do our job.”
Mrs. Schapiro, who was confirmed in January, agreed with lawmakers that the SEC’s reputation had taken a major hit because of the Madoff case. Congressional anger boiled over last month when it was revealed that Boston investor Harry Markopolos had supplied SEC officials with a detailed analysis of Mr. Madoff’s fraudulent empire in 2005 but the agency failed to act.
The agency’s top enforcement officer resigned in the wake of those revelations, and the SEC inspector general began an internal investigation into how the Madoff fraud went undetected for so long.
Mrs. Schapiro also confirmed reports that the SEC is weighing changes to two rules that critics say have accelerated the global stock market decline and exacerbated losses and capital problems at the nation’s banks.
She said she hopes the agency will put out for public comment within a month a plan to reinstate the so-called “uptick rule,” which forces short-sellers in the market to wait until a stock moves up in price before selling it. Many say concentrated moves by short-sellers - who profit when share prices fall - have pushed down equity market values around the world.
Mrs. Schapiro also said she was in favor of “more judgment in the application” of accounting rules requiring banks to mark their assets to their true market values. House Financial Services Committee Chairman Barney Frank, Massachusetts Democrat, and others say the rigid use of “mark-to-market” rules have forced banks to write off entirely or sell at fire-sale prices troubled assets that they had planned to hold for the long term.
But the SEC chief said she would oppose eliminating the rule altogether.
“Investors have told us that fair value is important to them because it gives them transparency and a real insight into the financial statements. And that’s information they need to make decisions about how to allocate capital,” she said.
Democrats and Republicans on the House panel sparred at times over whether budget and personnel cuts in the later years of the Bush administration had weakened the SEC’s enforcement powers.
“I have to say that the last administration at the SEC was the only agency I ever ran into that we would sit here and say, ‘How much do you need?’ and they’d say, ‘We have enough,’ ” said subcommittee Chairman Jose E. Serrano, New York Democrat.
Mrs. Schapiro said the agency lost 10 percent of its staff between 2005 and 2007 and that it “inevitably affected all of the SEC’s major programs.”
She told lawmakers that she would seek authority to tap a $17 million fund not used by the agency to bolster current operations, and President Obama’s fiscal 2010 budget calls for a 9 percent increase in the agency’s budget to $1.03 billion.
But Mrs. Schapiro agreed with Republicans on the panel that the agency did not need new rules to police the market as much as it needed more personnel to administer the existing rules.
“What I think we really need are boots on the ground,” she said.
She also expressed opposition to any plan to fold the SEC into a new “super-regulator” that the Obama administration, the Federal Reserve and lawmakers are now considering to deal with firms that pose a “systemic risk” to the U.S. financial marketplace.
“My concern about a single monolithic regulator is that we need an entity with ultimate responsibility for the protection of the financial system,” she said. “A systemic regulator will always trump an investor protection regulator’s concerns, I fear, and I don’t think that would be good in our market.”