New SEC chief Walter likely to follow Schapiro's lead
WASHINGTON — The leadership of the Securities and Exchange Commission will change next month. Its approach to regulation probably won't.
Mary Schapiro will step down as chairwoman after a tumultuous tenure in which she helped lead the government's regulatory response to the 2008 financial crisis. Replacing her will be Elisse Walter, one of five SEC commissioners, whose career path has tracked Schapiro's for nearly three decades.
Walter has served under Schapiro at the SEC and the Financial Industry Regulatory Authority, the securities industry's self-policing organization. Both women worked at the SEC in the 1980s. Walter was general counsel of the Commodity Futures Trading Commission when Schapiro led that agency in the mid-1990s.
She's expected to follow the approach Schapiro took at the SEC over nearly four years.
President Obama on Monday announced his choice of Walter, who will take over at a critical time for the SEC, which is seeking stricter rules for money-market mutual funds and must get into shape the so-called Volcker Rule, which would bar banks from making certain trades for their own profit.
The agency also is pursuing enforcement actions against banks over their sales of risky mortgage securities before the housing bust.
Obama can fill the SEC chairman's job without Senate approval because Walter has already been confirmed through 2013. That means Obama can avoid a potential confirmation fight until after the White House and Congress address the package of tax increases and spending cuts set to kick in next year.
The president will need to nominate a permanent successor before Walter's term ends in December 2013.
At FINRA, Walter was Schapiro's “right-hand person,” said James Cox, a Duke University law professor. As an SEC commissioner, Walter consistently voted with Schapiro on rule making and other initiatives. Cox said he wasn't surprised that both of Obama's choices have come from an industry self-regulatory organization.
The Obama administration “is not an eager regulator of the securities markets,” he said.
John Coffee, a professor of securities law at Columbia University, said Walter's leadership would likely resemble Schapiro's. She was Schapiro's “close assistant” and “has positions almost identical with Schapiro,” Coffee noted.
Walter, a 62-year-old Democrat, was appointed to the SEC in 2008 by President George W. Bush. Earlier, she was a senior official at FINRA, which Schapiro led before becoming SEC chairman in January 2009.
“I'm confident that Elisse's years of experience will serve her well in her new position,” Obama said in a statement.
Schapiro's challenges have probably been the most difficult any SEC chairman has faced, Coffee said. She took office after the financial crisis and the Bernard Madoff Ponzi scheme had eroded public and congressional confidence in the SEC. Since then, the agency has struggled with budgetary shortfalls.
“The Madoff scandal made Congress reluctant to fully fund the agency,” Coffee said.
Schapiro “has to be commended for working incredibly hard and against high odds” to maintain the agency's budget, Coffee added. Still, the agency is “underfunded and overworked, and that's not about to change.”
Schapiro will leave the SEC on Dec. 14. She was appointed by Obama in the midst of the worst financial crisis since the Great Depression and is credited with helping reshape the SEC after it was accused of failing to detect reckless investments by many of Wall Street's largest financial institutions before the crisis. She also led an agency that brought civil charges against the nation's largest banks.
In a statement Monday, Obama said, “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.”
But critics argued that Schapiro, 57, failed to act aggressively to charge leading bankers who may have contributed to the crisis. And consumer advocates questioned her appointment because she had led FINRA.
Under Schapiro, the SEC reached its largest settlement ever with a financial institution. Goldman Sachs & Co. agreed in July 2010 to pay $550 million to settle civil fraud charges that it misled investors about mortgage securities before the housing market collapsed in 2007. Similar settlements followed with Citigroup Inc., JPMorgan Chase & Co. and others.
The Goldman case came to symbolize a lingering critique of Schapiro's tenure: No senior executives were singled out. The penalty amounted to about two weeks of Goldman's earnings. And Goldman was allowed to settle the charges without admitting or denying wrongdoing, as were other large banks that faced similar charges.
Among the SEC's leading critics was U.S. District Judge Jed Rakoff, who questioned how the agency could let an institution settle serious securities fraud without any admission or denial of guilt. Rakoff later threw out a $285 million deal with Citigroup because of that aspect of the deal.
Lawmakers and experts say Schapiro made the SEC more efficient and fought for increased funding needed to enforce rules enacted since the crisis. She often clashed with Republican lawmakers who had opposed the 2010 financial overhaul law and wanted to cut the SEC's budget.
Schapiro faced criticism over a decision she made in response to the Madoff scandal. Madoff had been arrested a month before Schapiro took over at the SEC in January 2009.
Schapiro allowed her general counsel at the time, David Becker, to help craft the SEC's policy for compensating victims. It was later discovered that Becker had inherited money his mother had made as a Madoff investor. Schapiro acknowledged in 2011 that she was wrong to have allowed Becker to play a key role in setting the policy.
The SEC's inspector general concluded in a report that Becker participated “personally and substantially” in an issue in which he had had a financial interest. Some lawmakers complained that the affair further eroded the public's trust in the SEC.
Cox, the Duke professor, said that after a strong first two years, the SEC under Schapiro became less effective.
“The wind was really taken out of (Schapiro's) sails” by the political fallout from the Becker episode, Cox said. “I don't think she really got her legs back under her after that.”
For example, Cox said, Schapiro should have fought harder against legislation enacted in March that makes it easier for small start-ups to raise capital without having to comply immediately with SEC reporting rules.
Critics say the law went too far in removing SEC oversight and might open the door to corporate scandals or to the sorts of deceptions that led to the financial crisis.
Schapiro's push for stricter rules for money-market funds has been opposed by a majority of SEC commissioners in the face of resistance from the fund industry. But top regulators have pressed the SEC to adopt recommendations that include requiring funds to hold capital reserves against losses and placing limits on how fast investors can withdraw money.