Stakes high for SEC’s next chair

And that’s exactly the problem. As my longtime confidant and noted securities lawyer Bill Singer said recently, there’s real danger in being above suspicion.

“When you become so iconic that everyone refers to you by your first name, that’s a good time for regulators to say, ‘We want to have our bases covered with this guy so that we can’t be accused of any favouritism,'” Singer says. “The SEC and FINRA created this. There’s not a small firm in this industry that doesn’t get a close inspection at least once a year from the regulators. But this guy got a free pass.”

Indeed, comments from auditors suggest examinations of Madoff’s firm had been less than robust. “The (Securities Investor Protection Corporation) trustee said it would take a month to go through the books,” Singer points out. “That means there was nobody in there.” Even outgoing SEC chair Christopher Cox has acknowledged his staff hasn’t always been in the right place at the right time.

Enter Mary Schapiro, an extremely experienced securities regulator. She wields an enviable resumé and has justly earned the respect of her industry colleagues. Certainly, her appointment by president-elect Obama makes her a role model — only a fraction of people in high-profile Wall Street positions are women.

She has experience with futures, commodities and stocks. She’s also an attorney. On paper, it’s hard to imagine anyone better qualified for the job — although Annette Nazareth and Roberta Karmel would easily make the short list. And anyone chairing the SEC at this point in history will be thrust into the limelight. Schapiro will, arguably, be the highest-profile SEC chair since Joseph Kennedy took the helm in the agency’s inaugural year.

The question is whether she’ll lead the badly needed reform of the Commission. It’s clear the agency has become too politicized, and there’s evidence the enforcement division hasn’t always been free to do its job. The investments industry worldwide is watching its reputation get shredded. Now, as Singer notes, is not the time for foot dragging. “Schapiro’s strength is that she’s a calming influence,” he says. “But it’s a question of whether we need someone to pour oil on the water or to set it aflame.”

To really effect change, she’ll need to bring on some veteran staff — lawyers who have been on Wall Street for a decade or more. Then the SEC needs to hire some younger lawyers, promote from within, and start developing a staff that’s got institutional memory.

“If they only hire Ivy League, then there will be turnover because those people don’t stay on at government salaries,” says Singer. “And she needs to reach out to critics and bring them into the process. We don’t have to like each other, but there is a benefit to the clash of ideas in the marketplace.”

During her tenure at FINRA, and NASD Regulation, Schapiro was known for her ability to spot regulatory trends and get rules to plug systemic holes drafted quickly and approved. If she brings that pattern to the SEC, Canadian regulators may feel compelled to follow suit — which means Canadian firms and advisors would find themselves scrambling to adapt to a faster pace of regulatory change.

Singer, for one, hopes Canada doesn’t dive into the pit of quick-fix regulation. “The U.S. system has unravelled, so anybody looking to the U.S. as a model really better look again,” he says. “Our tripartite system — federal, SRO and state — isn’t working. It didn’t work in terms of the sub-prime crisis, it didn’t work on the collapse of Lehman and Bear, and it hasn’t been collegial. Each is trying to outdo the other for TV time.”

A tough set of circumstances for any chief regulator to step into. But history doesn’t choose the players. The players make the history, or not, as they choose.

(12/23/08)