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When Mary Schapiro arrived at the Securities and Exchange Commission in January, the agency’s morale and reputation were at rock bottom. The collapse in December 2008 of the Bernard Madoff Ponzi scheme, which the SEC had failed to detect despite years of warnings, unleashed a torrent of attacks against the commission from investors and politicians.
A few months earlier the SEC had been little more than a bystander to the debacle of Lehman Brothers Holdings, which it supervised, as the Federal Reserve Board and the Treasury allowed the firm to fail and then engineered a massive bailout of the financial system. Political interference had slowed activity in the SEC’s Division of Enforcement, the core of the agency, even as financial market turbulence created conditions ripe for investor abuse. Some critics questioned whether the agency could ever regain its relevance.
Sensing the urgency, Schapiro moved quickly to shake up the SEC. Less than two weeks after taking over as chairman, she publicly announced she was abandoning the policy of her predecessor, Christopher Cox, that had required the enforcement division to seek approval from the SEC’s five commissioners before negotiating fines with companies accused of violating securities laws. She also gave enforcement staff the power to open investigations without commissioner approval. By loosening the bureaucratic handcuffs, Schapiro hoped to give her staff a much-needed morale boost and signal a new activism at the agency.
"I wanted to do things that were visible and quick, so the staff could see we were headed in a new direction," says the 54-year-old lawyer and veteran regulator.
Schapiro has also moved swiftly to give a clear sense of purpose to that activism. Within days of taking office, she and her staff promptly drew up a list of hot-button issues that they aimed to tackle within a year. In subsequent months they have proposed new or revised rules in ten areas, including measures to impose restrictions on short-selling, facilitate shareholders’ ability to nominate directors and ban so-called flash trading, which allows some professional traders to see buy and sell orders a fraction of a second ahead of mainstream investors. The chief has made a number of high-profile appointments, most notably recruiting Robert Khuzami, a former federal prosecutor and Deutsche Bank lawyer (see sidebar), to take over the enforcement division. And drawing a lesson from the financial crisis, Schapiro has created a new Division of Risk, Strategy and Financial Innovation designed to help the agency anticipate potential problems stemming from financial innovation.
"We felt we had a lot of things to do right away," Schapiro told Institutional Investor in a recent interview in her office. "We felt the most important thing we could do is lay out an agenda and get to work on it. It became a popular expression around here to act like our hair is on fire."
Schapiro’s efforts have yet to bear much fruit, but her determination and energy have quieted many of the SEC’s critics, who no longer talk about shutting down the agency or merging it with the Commodities Futures Trading Commission. "That is one of her great successes — she changed the focus of the conversation," says Richard Ketchum, who has known Schapiro since they worked together at the SEC in the 1980s and who replaced her as CEO of the Financial Industry Regulatory Authority, or Finra, an industry body, earlier this year.
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