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Good Riddance, Mary Schapiro?

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Lauded by some, others see the departing SEC Chair as having been wholly ineffectual.

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MINYANVILLE ORIGINAL

After four years as Chairman of the Securities and Exchange Commission, Mary Schapiro will be stepping down next month.

"When Mary agreed to serve nearly four years ago, she was fully aware of the difficulties facing the SEC and our economy as a whole," President Obama said yesterday in a statement. "But she accepted the challenge, and today, the SEC is stronger and our financial system is safer and better able to serve the American people -- thanks in large part to Mary's hard work."

However, others see Schapiro's tenure as far less successful, with non-profit consumer rights group Public Citizen pointing out that "the SEC under Schapiro failed to prosecute any figure of note."

"If the problem is a culture on Wall Street to make money at all costs, with ethics having very little do with it, then I don't know a way to cure that other than through perp walks and profiles of senior executives adapting to life in prison," Bart Naylor, Public Citizen's financial policy advocate and a former investigator for the Senate Banking Committee, tells me.

The SEC points out that they "prosecuted the largest insider trading scheme ever discovered, winning a record $92.8 million fine" in a civil case brought against former Galleon Group CEO Raj Rajaratnam, now serving 11 years for trading on illegal stock tips involving, among others, Goldman Sachs (NYSE:GS), Google (NASDAQ:GOOG), and Procter & Gamble (NYSE:PG). But, as former SEC enforcement attorney and Justice Department prosecutor (and current Wayne State University law professor) Peter Henning told Bloomberg last year, "Insider trading is really flash."

Though the Rajaratnam prosecution was widely covered in the media, there is no escaping the absence of charges brought against those considered to have been at the root of the financial meltdown.

The SEC, says Bart Naylor, is "outspent tremendously by Wall Street" and is "outgunned when you look superficially at the dollar levels."

"That said, I think the SEC -- and I have a couple of acquaintances working there -- makes the decision to go after a relatively small fry because it's less expensive, requires fewer of their attorneys, and they have a higher chance of winning a settlement," he tells me. "At the same time, I think that if the SEC did swing for the fences, if you will, and take on those higher-level executives, while they might lose once or twice, they might also win a couple of times and I think that would be a really critical statement."

Success? In Whose Mind?

The SEC website currently features a page detailing its successes -- 734 enforcement actions in 2012. But Naylor is underwhelmed, explaining that in the aggregate, many of these accomplishments are half-baked, at best.

"We're seeing cases such as the recent one Justice brought against Countrywide/Bank of America (NYSE:BAC) that revealed frauds taking place, yet no human beings were apparently accountable for those frauds -- it was 'the company,'" Naylor tells me. "To the extent that the SEC is claiming success based on the 175 individuals that have been named, I applaud their recognition that this is how they should be judged, but considering that there is no senior person at any of the larger banks that clearly engaged in fraud being targeted, I think that by their own measures, they need to be judged as wanting."

"We catch a rogue trader now and then, but it's difficult to believe that it's just a bunch of low-level people that have gone off the reservation," he says.

Then, there is the issue of Mary Schapiro's past as CEO of industry self-regulatory group FINRA, where she developed a reputation for being weak on enforcement -- a charge that followed her to the SEC.

"On the implementation of Dodd-Frank , we have seen Schapiro generally defer to industry concerns, retreating to things the financial industry would be comfortable with," Naylor says. "She didn't seem to get out of bed in the morning worried about protecting investors. She was focused on reducing compliance burdens to the industry."

Remaking the SEC

Professor Lawrence G. Baxter of the Duke University School of Law focuses his teaching and scholarly research on the "evolving regulatory environment for financial services and beyond." In the "wake of the serious lapses preceding the Crisis," he says that "the SEC still needs to re-establish its credibility as meaningful guardian of open, fair, and transparent markets."

"I am not sure that Mary Shapiro fully succeeded in restoring the agency's former prowess," he tells me. "At the same time, I also agree with those who point out that Congress has effectively double-crossed the SEC by giving it greater responsibilities under Dodd-Frank and then denying it the necessary funds to perform these responsibilities."

Indeed, this is a serious issue -- Bart Naylor points out that JPMorgan Chase (NYSE:JPM) "spends as much on computer updates every year as the SEC does every few years."

"There are 4,000 SEC employees; there are 35,000 New York City police officers," he explains. "The SEC isn't even in the ballpark of having enough 'cops on the beat.'"

On the other hand, Professor Baxter tells me that other parties deserve a share of the blame, as well.

"One should also keep in mind that the banking agencies -- the OCC and Fed in particular -- also bear a good deal of responsibility for lapses contributing to the Crisis, and the SEC shares jurisdiction with the CFTC over many financial activities, so the SEC is sometimes unfairly treated as if it alone carries the responsibility to fix everything," he says. "Mary Shapiro had -- and any incoming chairman will have -- an extraordinarily difficult role to play, dealing with a hitherto unsupportive Congress, on the one hand, and various other powerful yet not always agreeable financial regulators, on the other. Intense enforcement will surely be one of the incoming chairman's priorities."

For now, SEC Commissioner Elisse Walter (and a former lobbyist for FINRA) will serve as interim Chair, about which Bart Naylor says he is "not thrilled," though he "want[s] to believe Obama will ultimately name a very strong, sharp-toothed Chair."

Some say the SEC, in addition to being chronically understaffed, has also been hampered by a lack of talent.

Back in 2010, Anthony Randazzo, Director of Economic Research for Reason Foundation, a non-profit think tank with a mission of "advancing free minds and free markets," described the problem.

"At the end of the day, financial markets need to have a regulator to enforce the law and ensure fair competition," he told me. "Even from a libertarian standpoint that is a good role of government. That said, the SEC has proven sorely incompetent, partially because of the inability to attract good talent."

"The best talent overwhelmingly goes to the Wall Street firms themselves, and the second best goes to the regulators," he continued. "So if you're constantly hiring people who didn't get hired by Goldman to regulate the people who did get hired by Goldman, eventually the regulator is going to miss something. Or a lot of things."

A Hopeful Scenario

With the advent of high-frequency trading and the like, Bart Naylor asks: "Has finance become so complex that it's unmanageable, even when it's legal?"

Whether it has or hasn't, he holds out hope that President Obama will ultimately select an SEC Chairman that passes muster as a reformer.

"The hopeful scenario is to look at what Obama has done with the other regulatory agencies," Naylor tells me. "And it's all been good. Tom Curry has been good at the OCC, which was a den of bank sympathy until he took over. And Gary Gensler has been surprisingly aggressive, though we were all a bit worried about the Goldman Sachs connection. I think Obama has calculated that it will be difficult to get economic reforms through a GOP-controlled House; with two-thirds of the Dodd-Frank rules yet to be finalized, it's going to require a zealous SEC Chair."

With all the problems facing the SEC, Naylor does have positive things to say about Enforcement chief Robert Khuzami.

"I don't have any issues with Khuzami," he says. "He seems to be the right profile guy to run the Enforcement Division -- getting Eliott Ness-types is far better than getting TS Eliot-types."

Follow Justin Rohrlich on Twitter: @chickenalaking
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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