In December, President-elect Obama nominated Mary Schapiro, currently the head of the Financial Industry Regulatory Authority (FINRA), to be the next Chair of the Securities and Exchange Commission (SEC) (her confirmation hearing before the Senate Banking Committee is scheduled for this Thursday). Schapiro has years of experience in securities regulation, and is widely regarded for her honesty and political independence. However, we're concerned that Schapiro may not be the right person to confront the extraordinary challenges that await the incoming SEC Chair.
Consider what Obama said about the current state of our financial regulatory system when introducing Schapiro:
In the last few days, the alleged scandal at Madoff Investment Securities has reminded us yet again of how badly reform is needed when it comes to the rules and regulations that govern our markets. Charities that invested in Madoff could end up losing savings on which millions depend--a massive fraud that was made possible in part because the regulators who were assigned to oversee Wall Street dropped the ball. And if the financial crisis has taught us anything, it's that this failure of oversight and accountability doesn't just harm the individuals involved, it has the potential to devastate our entire economy. [emphasis added]
Based on her own testimony, where she described her role in regulating "every aspect of the brokerage business," it sure sounds like Schapiro is one of the regulators who "dropped the ball," although it is hard to know exactly who is at fault. As a recent GAO report points out, the U.S. financial regulatory system is based on “a fragmented and complex arrangement of federal and state regulators,” which tends to result in a whole lot of finger pointing when things go wrong.
But regardless of who is to blame for our current economic mess, Schapiro has a troubling history of extolling the virtues of self-regulation. In our view, the incoming SEC Chair must be prepared to question the orthodoxies on which the existing structure is based.
We'll be watching the hearing closely to see if the Banking Committee asks Schapiro any tough questions about the viability of the current regulatory system.
-- Michael Smallberg
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