Regulatory Report Card: How Effective Was Mary Schapiro as SEC Chair?

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AP / Evan Vucci, File

Securities and Exchange Commission (SEC) Chair Mary Schapiro testifies on Capitol Hill in Washington.

SEC Chairman Mary Schapiro announced yesterday that she would be stepping down from her role in December, marking the end of one of the most eventful four-year periods in the SEC’s history.

When she assumed the Chairmanship of the SEC in January of 2009, the reputation of America’s financial regulatory apparatus was at its nadir. For more than a decade, regulators had failed to react to a growing real estate bubble, the bursting of which precipitated the worst financial crisis the country had seen in generations. Then, in December 2008, Bernie Madoff was arrested and charged with criminal securities fraud related to a decades-old ponzi scheme that he had operated right under the noses of the SEC, the most powerful and prominent securities regulator in the country. Meanwhile, large financial institutions were being bailed out with taxpayer money because the regulatory system had failed to require those firms to hold enough rainy-day capital.

Schapiro, in other words, came to Washington needing to not only help guide the country through the financial crisis, but justify the SEC’s very existence in light of its past failures.

Indeed, Schapiro’s central victory as SEC Chair may be that she protected her organization’s role in the regulatory process during the Dodd-Frank overhaul. The SEC’s reputation was damaged by the Madoff affair in particular, given that whistleblowers had repeatedly warned the regulator about the ponzi scheme over several years before Madoff’s machinations were finally exposed. As Huffington Post’s Mark Gongloff writes:

“Before Schapiro took office, there was talk in Washington that maybe the SEC, which had completely failed to notice Bernie Madoff openly ripping people off for years, should be abolished. Schapiro helped end that talk by showing that the agency could occasionally still take stabs at setting rules and enforcing laws on Wall Street.”

The SEC did emerge from the Dodd-Frank regulatory overhaul with its power mostly in tact. But if the successful waging of a regulatory turf war is one of Schapiro’s primary successes, that’s not much to write home about. After all, before Schapiro got the role of SEC chair, she was CEO of FINRA, the self-regulatory organization to which the SEC delegates much of its responsibility. FINRA and its predecessor organization, the NASD, did nothing to clamp down on the Madoff fraud during her years there. So the better question is whether Schapiro learned lessons from decades of failed regulation and was able to overhaul the culture that overlooked a $50 billion ponzi scheme.

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The record here is mixed and difficult to evaluate. The SEC, anticipating her departure, recently released a list of Schapiro’s accomplishments as Chairman. Among them are that the SEC brought a record number of enforcement actions — 735 in 2011 and 734 in 2012. In addition, the SEC says that it has brought 129 separate enforcement actions against individuals and entities whose actions directly led to the financial crisis, and that these fines totaled $2.6 billion.

Critics like Firedoglake’s David Dayen argue that bringing a record number of regulatory actions following a financial crisis marked by so much fraud should be a matter of course, not an accomplishment. Dayen also criticizes the SEC’s general approach to enforcement actions under Schapiro:

“In the aftermath of the financial crisis, which involved a high degree of securities fraud, no major executive or Wall Street figure has gone to jail for anything other than insider trading, mostly prosecuted out of the US Attorney’s office in Manhattan. The SEC pioneered a settlement strategy on various bad securities deals where they would pick one deal rather than make a platform case about a general pattern of conduct by fraudulent Wall Street firms, and then settle on that individual deal, allowing the securities issuer to neither have to admit or deny wrongdoing. After that, the SEC would never go back to the bank, as if they all only did one bad deal during the financial crisis.”

In Shapiro’s defense, it’s worth pointing out that the SEC doesn’t have the power to prosecute criminal acts — that responsibility lies with the Justice Department. In addition, Schapiro has petitioned Congress to increase the maximum fines the regulator can impose on individuals and firms per violation, a move that would bolster the SEC’s ability to deter future violations. If Congress were willing to increase the maximum fines the SEC can impose — and increase it’s paltry $1.3 billion budget — the SEC would surely be more effective on the enforcement front.

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One widely recognized success during Schapiro’s tenure is the enforcement division’s crack-down on insider trading. Schapiro and her enforcement chief Robert Khuzami had several high-profile successes on this front, including winning a $92.8 million fine in a case against Galleon hedge fund CEO Raj Rajaratnam. The parallel criminal investigation led to an 11-year prison sentence for Rajaratnam himself and to pleas or convictions for more than fifty other members of the conspiracy. Since 2009, the SEC has brought more insider trading cases than it did during any other three-year period in its history.

In addition to bolstering the SEC’s enforcement mechanism, Schapiro oversaw one of the most rapid periods of evolution of the nation’s financial markets in generations. The 2010 Dodd-Frank financial reform law gave the SEC and other regulators hundreds of new rules to implement, a process that was supposed to be finished more than a year and half ago, but that isn’t even half complete. Whether Mary Schaprio is to blame for the plodding pace of implementation is up for debate. Lawmakers’ expectations for rule making may have been too high given the complexity of the undertaking.

But Schapiro had one clear and high-profile failure when it came to implementing reform of the money market fund industry. The money market fund industry played a big role in the 2008 financial crisis when the Lehman Brothers bankruptcy triggered a run on these funds. In order to promote financial stability, Schapiro hoped to require money market funds either to hold more capital in reserve against losses, or for those funds to disclose their share prices like mutual funds, which would make it more clear to investors that money market funds are not guaranteed investments like bank deposits. But Schapiro couldn’t muster the three commission votes necessary to move forward with reform, and the fight to fix the problem has since moved the the Financial Stability Oversight Council.

Another area where critics found Schapiro’s performance lacking is high-frequency trading. The 2010 flash crash, the bungled Facebook IPO, and the Knight Capital Partners trading debacle earlier this year are all evidence of the risks posed by an increasingly fragmented market dominated by computerized traders. Schapiro has taken some measures to curb these risks, like the implementation of so-called circuit breakers, which halt trading on stocks showing movement that may be caused by glitches in high-frequency trading software. In addition, this summer Schapiro successfully implemented a rule requiring exchanges to establish a market-wide audit trail that will enable regulators to better monitor trading activity and understand the effects high-frequency trading is having on the market.

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But there are still many unanswered questions regarding high-frequency trading like whether exchanges are giving unfair advantage to high-speed trading firms in order to garner their lucrative business; and whether having a highly fragmented stock market with many trading venues poses a systemic risk to the financial system. It may be too much to expect Schapiro to have dealt completely with this contentious issue in her one term as SEC Chair, but it is fair to say that much more needs to be done to regulate this new and growing force in the industry.

The most difficult part of judging any public official’s legacy is seperating that which she is responsible for from that which is out of her control. Dodd-Frank implimentation has been painfully slow, weighing the economy down with regulatory uncertainty. But to what extent is this the fault of regulators and to what extent the fault of law makers and lobbyists who made the law needlessly convoluted? Can Mary Schapiro really be blamed for the fact that three of her fellow commissioners refused to vote for money market fund reform? These sorts of questions are unanswerable to anybody who wasn’t in on every meeting, negotiation, and phone call of Schapiro’s since 2009. But looking back on her record, despite her successes, one is struck by how much work there is left to do.

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