OT New head of the SEC.
Not what I evisioned.
Obama's Pick to Head SEC Has Record Of Being a Regulator With a Light Touch
By RANDALL SMITH, TOM MCGINTY and KARA SCANNELL
When President-elect Barack Obama nominated Mary Schapiro to lead the Securities and Exchange Commission, he criticized regulators for having "dropped the ball" in a "failure of oversight" in the markets meltdown and the Bernard Madoff scandal.
But a close examination of Ms. Schapiro's record as a regulator shows she has infrequently pursued tough action against big Wall Street firms.
A regulatory-agency merger that Ms. Schapiro oversaw shifted power to larger financial firms at the expense of small ones. The agency she heads, called the Financial Industry Regulatory Authority, or Finra, missed the mortgage crisis and Bernard Madoff's alleged $50 billion Ponzi scheme.
Last year, amid historic market convulsions and Wall Street scandals, Finra often filed tiny cases against small players. During the past few years of Ms. Schapiro's career as a regulator, which earns her over $3 million a year, enforcement fines against firms have plunged.
Ms. Schapiro, whose Senate confirmation hearing is Thursday, has broad regulatory experience. She was an SEC commissioner and led the Commodity Futures Trading Commission and the National Association of Securities Dealers, or NASD, a securities-industry body that was a predecessor of Finra.
People close to Ms. Schapiro, 53 years old, say she can be tough on Wall Street. They say she has shut down "boiler rooms" whose brokers engaged in fraudulent sales tactics; has gone after improper variable-annuity sales; led the adoption of tougher sales-practice rules; and focused on abuse of senior citizens by brokers.
In addition, as head of the regulatory arm of the NASD in the 1990s, she greatly expanded her enforcement staff and levied some big fines for abuses during the tech-stock bubble. "She has been an advocate for investor protection," says Steven B. Caruso, who represents investors in claims against brokerage firms.
Finra is a private agency set up by Wall Street to regulate itself and is the first line of defense in policing the activities of securities firms and protecting investors. It was created in July 2007 by combining the enforcement arm of the NASD and part of the New York Stock Exchange's regulatory apparatus.
Among other things, Finra monitors brokerage firms' sales practices to determine that investors are being sold products suitable for their needs. It reviews brokerage firms' capital positions and makes sure customer funds are handled properly. It seeks to ensure that firms have adequate procedures to price hard-to-trade securities and monitors customer complaints firms receive concerning both sales practice and operational issues.
Finra levied fines against financial firms totaling $40 million in 2008, according to a Wall Street Journal analysis. That was the third straight annual decline in fines levied by Finra or one of its predecessor agencies, the NASD. The total was 73% below the $148.5 million in fines collected in 2005, the year before Ms. Schapiro took the helm of the NASD.
The number of complaints filed with Finra each year doesn't move in tandem with fines. Cases usually aren't settled in the year they're brought to regulators' attention. In recent years, the number of complaints fluctuated between a high of 5,982 in 2002 and a low of 4,552 in 2007.
Ms. Schapiro advocated the regulatory merger that created her agency by arguing in 2007 -- just before the mortgage bubble burst and financial firms wobbled -- that the result would be "reducing regulatory costs and reducing burdens" for Wall Street firms.
After working at the SEC, Ms. Schapiro became head of the NASD's regulatory arm in 1996, of the NASD itself in 2006, and then head of Finra after its creation in 2007.
During that time, the NASD and Finra were involved in several examinations of the brokerage business of Mr. Madoff, who stands accused of running a giant Ponzi scheme; her agency concluded in 2007 only that his firm had violated technical rules and had failed to report certain trades in timely fashion.
Harry Markopolos -- a money manager who provided information on Mr. Madoff to the SEC and repeatedly urged it to investigate Mr. Madoff -- says he avoided taking the same information to the NASD. Mr. Markopolos says he and his brother, then a trader, had taken other issues to regulators at the NASD but it had never responded. He says he also assumed his concerns wouldn't be pursued because both Mr. Madoff and his brother, Peter, had served as officials of NASD and its trading arm, the Nasdaq Stock Market.
Finra was by no means the only one that didn't spot what Mr. Madoff was doing. Neither did the SEC nor many sophisticated investors.
People familiar with Ms. Schapiro's views say Finra's jurisdiction was limited to inspections of brokerage accounts, whereas the Madoff scandal took place outside those accounts. However, according to an SEC report in 2005, Mr. Madoff maintained -- falsely, it later turned out -- that his business involved managed brokerage accounts, a business within Finra's purview.
Some securities lawyers and others say Finra should have at least asked more questions about the entire Madoff operation. "We should be asking: Why didn't Finra catch up to Madoff?" says Stephen Nelson, a securities lawyer who represents firms examined by Finra.
The Senate Banking Committee, the panel reviewing the Schapiro nomination, last week asked the SEC to turn over all documents from its reviews of the Madoff firm as well as any examinations conducted by Finra or its predecessor firms. Finra officials say Ms. Schapiro has publicly voiced concerns about "regulatory patchworks that left gaps" in oversight.
Finra also appears to have lagged behind in a Wall Street mess that affected thousands of individual investors in early 2008 -- a freeze-up in the market for what are known as auction-rate securities. These are long-term debt securities whose interest rates are supposed to be reset at weekly or monthly auctions. When the auctions failed, investors were stuck and couldn't sell the securities.
Finra and other regulators launched probes of the matter. But Finra, along with the SEC, was beaten to the punch by state regulators and Finra was largely left on the sidelines. In June and July 2008, Massachusetts and New York securities regulators filed fraud charges against big firms in the matter, around a month before the SEC settled charges against several big firms that required them to buy back securities from investors.
Six weeks after that, Finra announced settlements with five much smaller firms, including SunTrust Robinson Humphrey Inc., Comerica Securities Inc. and First Southwest, and in October settled with three more. The total amount of auction-rate securities it required these firms to buy back from investors was less than $2 billion, compared with $40 billion required by the state regulators and the SEC.
A Finra official says the SEC had asked the agency to "stand down" from any action against the big firms that underwrote the auction-rate debt and focus instead on "downstream" firms that merely resold the securities to individual investors. An SEC official says they agreed to divide up the firms and the SEC wanted to keep the firms that were previously investigated for similar conduct in 2006.
One of the biggest Wall Street disasters of 2008 was the September bankruptcy filing of Lehman Brothers Holdings Inc., setting off financial panic. Finra had filed small cases against Lehman earlier in the year.
One related to flaws in its "organization plan," and one was a fine of $125,000 for failing to keep accurate "books and records" relating to its "net capital and excess net capital." But Lehman's problems ran far deeper: not having enough capital and apparently carrying its huge holdings of complex mortgage securities on its books at too high a value.
People close to Ms. Schapiro say the Lehman mess and the broader mortgage meltdown occurred outside of what Finra inspects: brokerage accounts. But firms were selling the mortgage securities in brokerage accounts, to investors large and small. Finra is also responsible for seeing to it that the valuations of securities sold in brokerage accounts are accurate.
Joseph Mays Jr., a consultant to small broker-dealers and a former NASD examiner, says Finra should have scrutinized the mortgage-backed securities at the root of the crisis. "If I had to assign blame, I'd blame Finra and the SEC, but I'd blame Finra first because it's the first line of defense," he said.
Finra says it monitors capital positions but only of broker-dealers, not of their parent firms, where the most disastrous losses occurred.
In any case, say Finra officials, the agency was "on site monitoring the capital adequacy of the [Lehman] broker-dealer" as soon as the first big-firm meltdown took place in the spring, that of Bear Stearns Cos.
At Citigroup, which has had huge mortgage-related write-downs and still struggles despite massive federal aid, Finra's largest 2008 action was a fine of $300,000 for failing to supervise commissions on stock and options trades.
At an event in May, Ms. Schapiro was asked a question about getting tough about mortgage-backed bonds, the securities at the heart of the crisis, and one listener says she seemed to suggest depending on credit-rating agencies that rate the bonds.
The Financial Services Institute, a trade group, was meeting, and Ms. Schapiro addressed the crowd about Finra's efforts to fight frauds aimed at senior citizens. Frank Congemi, a financial adviser, asked what Finra was doing to regulate "packaged products" such as complex mortgage securities. Mr. Congemi says that Ms. Schapiro replied: "We have rating agencies that rate them." The credit-rating agencies, by this time, were being heavily criticized for having given triple-A ratings to mortgage bonds that became unsalable as foreclosures rose.
Mr. Congemi says that at the May 7 meeting he retorted: "What is that going to do to markets and people's trust when these things go to zero?" He says Ms. Schapiro replied that she couldn't answer hypothetical questions.
Finra officials acknowledge Ms. Schapiro's attendance at the event, but say they don't recall specifics of the exchange.
When bringing charges against large securities firms, Ms. Schapiro has occasionally appeared to go easy on them. The NASD in 2006 accused Morgan Stanley of failing to produce emails sought by regulators and investors and falsely claiming they'd been lost in the 2001 terrorist attacks.
Before bringing a civil administrative complaint, Ms. Schapiro at the NASD met with Morgan Stanley's general counsel, Gary Lynch, who sought to have the charges dropped or softened. Mr. Lynch is a former SEC enforcement chief with whom Ms. Schapiro had worked. The meeting was one of only a handful she has held as a regulator with a senior executive of a firm about to be charged.
After Finra was created, its enforcement chief, Susan Merrill, assumed oversight of the case. She, too, had previously worked for Mr. Lynch, at the law firm of Davis Polk & Wardwell. The matter was settled in September 2007, after Morgan Stanley persuaded Finra to cut the size of a restitution fund.
In interviews at the time, Ms. Merrill noted that Finra hadn't found Morgan Stanley intentionally withheld emails. The softer settlement angered some other Finra staffers, according to people familiar with the agency.
People familiar with Ms. Schapiro's position say she did nothing improper and wasn't showing favoritism, and that Morgan Stanley didn't get off easy. Ms. Merrill had no comment.
When Ms. Schapiro arrived at the NASD in 1996, the agency was under an SEC mandate to beef up its enforcement efforts after a scandal in which small-stock traders conspired to fix prices. As head of the NASD's regulation effort, Ms. Schapiro tripled the enforcement staff to about 200 from 60.
After the stock-market bubble of the late 1990s and early 2000, the NASD charged that some big Wall Street firms had profited at investors' expense. For instance, the NASD and the SEC levied a $100 million fine in 2002 against Credit Suisse Group to settle charges of misconduct in allocating hot initial public offerings. The two agencies also fined Morgan Stanley $50 million in 2003, to settle charges that its brokers had improperly favored mutual funds that paid the firm more commissions.
The merger of industry self-regulatory bodies that created Finra reduced the voice of small brokerage firms. The NASD had allowed up to 15 of its 18 NASD directors to represent small brokerage firms. Small firms had begun electing dissidents to the NASD board, including people who objected to what they saw as heavy-handed regulation. Finra, the product of the merger, would limit small firms to electing just three of 23 directors.
To win support for the merger, Ms. Schapiro campaigned by promising streamlined regulation -- and a cash payment of $35,000 per firm.
"We remain utterly committed to our regulatory mission, but we should be also committed to doing no unnecessary harm or restriction to innovation in the industry and markets," she said publicly as she launched the pro-merger campaign in late 2006.
Ms. Schapiro has become one of the highest paid regulators. After the merger created Finra, with her as chief, she received a pay package of $3.1 million a year, including $2.5 million in compensation and $615,000 in benefits and deferred pay. In 2007 she also earned $449,000 in cash and stock grants as a director of Duke Energy Corp. and Kraft Foods Inc.
