SEC Will Have To 'Leverage' Resources: Schapiro

Corporate Law Center in Law360, September 27, 2010

Media Source

By Evan Weinberger

Law360, New York (September 27, 2010) -- U.S. Securities and Exchange Commission Chairwoman Mary L. Schapiro said Monday that her agency would have to “leverage private resources” and be nimble as it embarks on an ambitious rewrite of the financial regulatory framework, but that it will be ready.

“We have embarked on a very public and transparent process to get input into how we address the issues,” Schapiro said at a conference at the Fordham Law School Corporate Law Center that celebrated the 75th anniversary of the commission.

She appeared with former SEC chairmen Richard C. Breeden and Harvey Pitt.

The commission, along with the U.S. Commodity Futures Trading Commission and other financial regulatory agencies, has been charged with a massive rewrite of the rules of the financial road under the Dodd-Frank Act that President Barack Obama signed into law in July.

The SEC has to rewrite 105 rules, create five new divisions — four of which will report directly to the SEC chairman — and engage in 20 studies solely on its own, Schapiro said.

The commission has until July 2011 to complete much of its rewrite.

The first new rule, regarding the registration of municipal securities advisers, goes into effect Friday.

Pitt, who ran the SEC in the first two years of President George W. Bush’s administration, cautioned that the Dodd-Frank Act might have given the SEC almost too much responsibility.

“In the SEC’s case, I think one of the concerns about Dodd-Frank is ... it sets the SEC up for potential failure,” Pitt said.

The commission needs more resources, and should have been given the right to self-fund under the Dodd-Frank Act. Other U.S. financial regulatory agencies, like the Federal Deposit Insurance Corp., have the right to fund themselves by making an assessment on the companies under their watch.

Schapiro said the commission would have to “leverage” the assets of the private sector and other government agencies moving forward.

She pointed to the requirement that the self-regulatory organizations like Financial Industry Regulatory Authority will be required to create a consolidated audit trail for all financial transactions in the wake of the May 6 stock market flash crash.

That will cost hundreds of millions of dollars that the SEC does not have, she added.

Breeden said that Dodd-Frank's focus on the banking sector has left him with a major concern.

"Investor protections and concern about investor issues has slipped very significantly in the national agenda over the last 20 years," he said, advising Schapiro to go back to that core function after completing the Dodd-Frank overhaul.

Schapiro said she was "feeling the burden" of the job, getting a laugh from the audience.

The SEC came under fire for missing some of the activities that led to the financial crisis, particularly with regards to mortgage-backed securities and major frauds like that of Ponzi scheme mastermind Bernard L. Madoff.

Under Schapiro’s watch, SEC enforcement chief Robert Khuzami has taken a more aggressive stance in policing financial markets, with notable cases against Goldman Sachs Group Inc. and several other Wall Street titans.

Those cases have had mixed success.

Both Breeden and Pitt questioned the need for corporate penalties in securities cases, saying they would prefer to see a focus on individual responsibility. Pitt pointed to recent court rejections of SEC settlements with Bank of America Corp. and Citigroup Inc.

Schapiro said although the question of fining corporations, which harms current shareholders for past deeds, is complex, the practice is necessary.

“The answer can’t be that a company can’t be held accountable just because the shareholders would be forced to bear the fine,” she said.

Schapiro said the SEC had embarked on a major upgrade of its training for employees and had success in bringing in recent Wall Street veterans to increase its understanding of modern financial instruments.