Mary Schapiro’s Unfinished Business

The outgoing SEC chairman saved the agency — and fell short on several fronts | “It was harder than I thought it was going to be”

Robert Schmidt, Peter Coy, Joshua Gallu, and Jesse Hamilton

The SEC was under fire when Schapiro took over


When Mary Schapiro steps down as chairman of the Securities and Exchange Commission on Dec. 14, she’ll leave behind an agency riven by partisanship. It now falls to her successor, Elisse Walter, to carry out President Obama’s agenda over the resistance of Republican commissioners, skeptical conservative judges, and a well-financed financial industry lobby. “You need someone who’s pretty thick-skinned” to move the SEC forward, says Barbara Roper, director of investor protection at the Consumer Federation of America. “Schapiro’s been chairman under the most difficult conditions I’ve seen an SEC chair face in the 25 years I’ve been following these issues.”

Walter, 62, can lead the agency through 2013 without Senate approval, having already been confirmed as a commissioner in 2008. A cancer survivor, she’s sent mixed signals in recent months about her long-term plans. An administration official speaking on condition of anonymity says Obama intends to nominate another person to the commission soon. That person could become chairman. Possible nominees include former SEC commissioner Harvey Goldschmid and Sallie Krawcheck, a former Bank of America and Citigroup executive, people with knowledge of the matter say.

Walter has spent the past four years as Schapiro’s closest confidant and behind-the-scenes adviser, while shunning the spotlight. “She’s sincere and dedicated, and the administration knows where she stands,” says Paul Atkins, a former Republican commissioner who’s now chief executive of Patomak Global Partners, a consulting firm.

Walter has shown signs that she may forge a more pro-regulation path than Schapiro. In July, Schapiro and the two Republican commissioners voted in favor of a rule that allows brokerages to report some trades to a central database a day after they occur. Walter wanted the information recorded in real time, saying the exemption would “ensure that the industry remains one step or one day ahead of the regulators.”

Whoever runs the SEC will have to deal with a politically polarized commission and manage an unwieldy bureaucracy that’s been criticized for missing financial frauds. The chairman will also have to grapple with high-frequency trading and a fragmented market structure in which trading takes place on multiple electronic exchanges. That complexity helps spark disruptions like the so-called flash crash, a May 6, 2010, market drop that temporarily erased $862 billion from stock values. Complicating matters for the Democrats, Schapiro’s departure will temporarily leave the commission evenly divided between two Democrats and two Republicans, making it even harder to enact controversial policies. “With the two-two division, in many ways the best we can hope for in the short term is sort of a stalemate,” says Roper.

Schapiro, 57, joined the SEC in January 2009, and was immediately confronted with fallout from the financial crisis and revelations that it had missed the multi-billion-dollar Ponzi schemes run by Bernard Madoff and R. Allen Stanford. While Schapiro was credited with rebuilding confidence in the agency, she’s been criticized for not punishing high-level banking executives and for acting slowly to institute the Dodd-Frank Act’s financial regulations. Two years after Congress handed the SEC the challenge of crafting almost 100 rules, the agency is behind schedule on about half, according to a tally by law firm Davis Polk & Wardwell. “It was harder than I thought it was going to be,” Schapiro said of her tenure during an October interview with Bloomberg News. “You have this nice little box of things you want to do all tied up with a bow, and you walk in the door, and it’s very hard to keep at least one eye on that agenda while you’re dealing with the flash crashes and the new legislation and the whole range of things that happened.”

Even so, Schapiro says the agency accomplished a lot on her watch. “We’ve had one of the busiest rule-making periods in the entire history of the agency,” Schapiro said in the interview. “Does everybody have individual things they’d love to see at the top of the queue? Without a doubt. Myself included. But we have to follow a script that Congress laid out for us.”

Schapiro, the SEC’s first female chair, came on board as Obama administration officials were floating a plan to strip down the regulator’s responsibilities, or even merge it with another agency. Schapiro, who had been CEO of the Financial Industry Regulatory Authority, rebuilt the enforcement unit with industry experts and improved technology. She recruited Robert Khuzami, a former prosecutor then at Deutsche Bank, to head it. She also tapped Carlo di Florio from PricewaterhouseCoopers to revamp the inspections unit, which had been faulted for missing Madoff’s fraud. “I give her enormous credit for virtually single-handedly preventing the commission’s demise,” says former SEC chairman Harvey Pitt.

SEC lawyers have scored some victories. In two cases related to subprime mortgages, they won settlements of $550 million from Goldman Sachs Group and $67.5 million from Angelo Mozilo, co-founder of Countrywide Financial. Still, the agency was attacked by lawmakers, judges, and consumer groups for not going after individual Wall Street bankers. SEC lawyers didn’t take action against anyone at Lehman Brothers or American International Group, companies at the epicenter of the credit crisis. Lynn Turner, a former SEC chief accountant, says the agency’s enforcement record signals to Wall Street that the tough talk is just rhetoric. Schapiro “has created a culture where it is better to ask for forgiveness than beg for permission,” Turner says. “And the trouble is, she always forgives them.”

Jeff Connaughton, author of The Payoff: Why Wall Street Always Wins, says Schapiro’s equanimity kept the agency from solving tough policy problems, such as how to cope with changes in the structure of the markets. Connaughton, who in 2009 and 2010 served as chief of staff to Ted Kaufman, a Democratic senator from Delaware, says he pressed Schapiro to strengthen rules for high-frequency trading before and after the flash crash. “She is a regulator by consensus,” Connaughton says. “I could tell from the first time I met her that there was not a whiff of boldness about her.”

Schapiro had hoped her legacy would include new rules for money-market funds. Her plan, developed in conjunction with the Treasury and the Federal Reserve, would have given funds a choice: either hold extra capital to prepare for future crises, or drop the practice of letting investors buy and sell shares set at a fixed $1 value, which lulls them into thinking they can’t lose money, and price funds by their market value. Mutual fund companies, saying the changes would destroy rather than save the product, enlisted the U.S. Chamber of Commerce in a lobbying campaign. In the end, Schapiro couldn’t persuade any commissioner other than Walter to back her plan.

In September, Treasury Secretary Timothy Geithner acted under new powers granted by Dodd-Frank to force the commission to take up the issue again. Schapiro said she welcomed the intervention. “My goal wasn’t to be a martyr,” she said in October. “My goal was actually to get this done.” It will now be up to another SEC chairman to do it.

The bottom line While Schapiro restored confidence in the SEC, she failed to go after top Wall Street executives or achieve money-market fund reform.


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