SEC Chief Mary Schapiro: The Watchdog's New Teeth


Stephen Voss

As the dimensions of the financial crisis grew ever larger, the effectiveness of the Securities & Exchange Commission grew ever more dubious. Then came the Bernie Madoff scandal. And if you believe an investment manager named Harry Markopoulos, who repeatedly denounced the Madoff operation as a Ponzi scheme to a couldn't-be-bothered SEC, the agency wasn't just asleep at the wheel, it was snoring loudly. All of which is why so many eyes are on new SEC Chairman Mary Schapiro, who in January was appointed by President Obama to clean up the mess former Chairman Christopher Cox left behind. As a financial regulator under three Presidents—including six years as an SEC commissioner—Schapiro is no stranger to the agency or the industry. In fact, she later served as head of the NASD and was one of the architects of the industry's self-regulating Financial Industry Regulatory Authority. Now, as she deals with issues from executive comp to short-selling, Schapiro will have a hand in determining the shape and direction of the financial industry for years to come.


One of the big questions on Wall Street these days is whether the SEC will get the congressional authority to regulate hedge funds and when. Do you think that will happen and how soon?


I do think the SEC will be given authority to register and regulate hedge funds. There is a broad consensus that unregulated parts of our financial system—whether it's hedge funds, credit-default swaps, or other investment vehicles—have to come under the regulatory umbrella. That doesn't mean we stuff hedge funds into the investment company model but rather we regulate them with the understanding that there are unique aspects to their business. It's completely appropriate for that to happen, and I expect it will this year.

The Wall Street Journal is reporting that the Administration is talking about reining in executive compensation across the financial industry—beyond banks receiving TARP money. Do you agree with that direction, and doesn't it smack of creeping socialism?
Well, there are a lot of questions about how far the government can and should go in terms of directly regulating executive comp. Our approach at the SEC has generally been one of disclosure, and we're actually working to fine-tune comp disclosure rules to make sure it's abundantly clear to investors what the link is between how compensation programs are designed and risk-taking within an institution. I don't honestly know how far disclosure rules will go for non-TARP recipient institutions. I don't know what the right answer is yet, but I think it's something that's perfectly legitimate for the government to be looking at, given the role that compensation has played in getting us to this not-very-happy point.

As you know, the SEC is seeking public comment on whether to permanently restrict short-selling. Don't short-sellers perform a function by identifying companies with weak management or faulty strategies? Or are we talking about fraud in some cases?
Well, I think we are talking about fraud in some cases. And I agree with you that there's a valuable role that's played by short-selling. It brings information into the marketplace that's incredibly useful and valuable. I think all we're talking about at the SEC when we talk about restricting short-selling is a sort of speed bump that slows the descent of stocks during these particularly volatile times. And so we've put out multiple proposals. A couple of them are broad, short-selling speed bumps, and then a couple are stock-specific, more like a circuit breaker approach. If a stock declines, say, 10% within a day, then a circuit breaker might kick in and either that stock couldn't be sold short for a period of time or maybe then an uptick rule kicks in for that stock. And we'll obviously get tons and tons of comment on this, but I have heard from hundreds, maybe thousands, of investors really feeling it's appropriate to slow this process down. At the end of the day, the stock's going to find its natural price. But that abuse of short-selling may well have contributed to some of the problems we're facing right now.

You have a new enforcement chief, Robert Khuzami, and you're getting more funding from Congress. Does the SEC have enough firepower to be the watchdog it failed to be in the financial crisis and the Madoff affair?
I would never say we have absolutely enough because we're a pretty small agency. So we are always going to have to be selective in what we can do. But, as you say, we have an aggressive enforcement director, Rob Khuzami, who was a prosecutor in the Southern District of New York for 11 years.

But you don't need just more boots on the ground, you need the right boots.
Exactly. We need the right skill sets. That's something we're very much focused on. We're hiring specialized senior examiners with expertise in trading, financial analysis, forensic accounting, and risk management.

One of the raps against your appointment was that while your knowledge and integrity are widely respected, you're an insider who might not be able to bring about the earth-rattling change that's needed. Are you going to be able to knock heads as Joe Kennedy did when he was named to reform the SEC by FDR?
I think so. I left a job I loved. I left a job most people would want to go to from here. This is not a stepping stone for me. I came here because I love the clarity of the mission. I work for the American taxpayer, and it doesn't get any clearer than that. My view is every single day we're going to do what we think is right, and we'll take some shots because we won't make everybody happy, but I wouldn't have come if I didn't think I had the freedom to do whatever was necessary to rebuild and revitalize the SEC and make it an important player again on the economic stage. I guess time will tell, but I think we're making a lot of important changes, and I haven't shrunk from any of them.

Maria Bartiromo is the anchor of CNBC's Closing Bell.

Maria Bartiromo is the anchor of CNBC's Closing Bell and writes the blog, Maria Bartiromo's Investor Agenda, at http://investoragenda.cnbc.com.

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