SEC Chair Schapiro: The Agency Lacks the Tools to Get the Job Done

Securities and Exchange Commission Chief: We Need More Regulators

Here is Senator Kaufman’s reaction in an exclusive responding to Schapiro’s comments

Courtesy of Fox Business News: A transcript of FOX Business Network’s Liz Claman interview with the Securities and Exchange Commission Chairwoman Mary Schapiro

LIZ CLAMAN, ANCHOR, FOX BUSINESS NETWORK: Mary Schapiro I want to thank you so much for joining us on FOX Business.

MARY SCHAPIRO, It’s my pleasure. Thank you.

CLAMAN: You arrived at the SEC in late January and you hit the ground running. You have been filing more than -what – 530 cases? You are handing out fines of all sorts. It feels like a new and different, more aggressive, SEC. What do you want the image of the SEC to be today?

SCHAPIRO: I’d love for the image of the SEC to be one of pure investor advocate. The agency that is there enforcing the rules and requirements, ensuring a level playing field for investors when they are involved in the securities markets. An agency that is thinking ahead and around the corner about issues that could impact investors over time and dealing with those issues proactively so that we’re putting people in sort of the strongest possible position, to interact with the securities markets and with financial intermediaries.

CLAMAN: But you’re dealing with the business world, the investor community, Congress, the president, you’re getting pulled in a lot of different directions. Whom do you serve first?

SCHAPIRO: We serve investors first. And that’s clearly the orientation the SEC has had historically, and must maintain going forward. Over 75 years there has been one agency of the federal government solely dedicated to protecting investors, that’s the SEC. And that’s got to be our true north. I’m committed to maintaining that.

CLAMAN: But right now I’m looking at an SEC emergency room, and every seat is filled with patients like financial crisis victims, insider trading, Ponzi-type schemes, do you perform triage with the cases that were caused by the financial crisis? Or do you do the insider trading, or the Madoff-type Ponzi schemes? Or do you start to attack just who should have the most oversight power? Which is first? (ph)

SCHAPIRO: Well, it’s a hard question. And it’s one we wrestle with everyday. How do I allocate our resources? Because the agency is not as big as it needs to be. We don’t have all the tools that we would like to have. We have shut down about three times as many Ponzi schemes in the first half of this year, as we did last year. We have brought some big financial crisis cases, look forward to do that. It is important to continue insider trading. It goes right to the integrity of the marketplace and the fairness for people who are dealing in the markets.

CLAMAN: So it sounds like –

SCHAPIRO: We need to try to do it all.

CLAMAN: doing everything.

SCHAPIRO: We can’t do every single thing, so we need to prioritize. I say cases coming out of the financial crisis are particularly important to our ability to restore investor confidence in the agency and in the economy.

CLAMAN: Senator Ted Kaufman sent you a letter on Monday. He is demanding an entire review of the markets and how fair they are, or not. Will you agree to do that?

SCHAPIRO: We are going to do that. In fact, we had already begun the process of looking at market structure. The SEC has always done a very good job, I think, of keeping up with market structure changes. But just in the last couple of years we see enormous advances in technology, high frequency trading, and a wide variety of issues associated with that. So we are planning to do sort of a big concept release, ask a lot of questions about market structure, have the rules and regulations kept up? What should we be focused on? How do we ensure a level playing field for investors? How do we deal with some of the information asymmetries that exist in the market today? How do we keep abreast of the technology? So we’re going to do something very similar to what he is asking.

CLAMAN: How do you keep up? I mean, pro-actively. I’m not talking about enforcement of the rules already in place. But pro-actively, what is this SEC doing to keep that playing field level and fair for the investor.

SCHAPIRO: I think it is really important that we have a very, very big focus on the risks. And one of the things we’re going to do is to really bolster the risk assessments capabilities within the agency. And bolster our capabilities to do robust economic analysis. So that we’re in a position to understand new trading strategies and products, the implications of unregistered entities in the marketplace; build more effectively on an international basis with new products, and new strategies. So, we’re in the process of building that capability in, I think, a very fundamental way. And perhaps for the first time for the SEC, really to have some of the skills sets that it needs to keep up that we haven’t historically had.

CLAMAN: Does that mean you’ll have to hire more traders? More MBAs?

More financial insiders and experts. You know, I think of IT companies hiring former hackers, to try and figure out the backdoor, sneaky way that these guys pull off some tricks. Is that something that is a priority for you? And do you have enough money in the budget to do that? Or do you need more money?

SCHAPIRO: Well, it is a priority. We have to bring in people who understand financial analysis, who understand derivatives, who understand trading strategies and new products. Some of the kind of rocket scientists who designed some of the products that have been let loose on Wall Street. So we are trying to recruit those kinds of people right now. And we’re getting tremendous response to the positions that we’ve posted, looking for those new skill sets. We don’t have enough of those positions, at this point. But they’re working very hard to increase the size of our budget and have the ability to bring in people, directly off the Street, who really understand the business in a very up-to-the-minute kind of way.

CLAMAN: Percentages? How much, as a percentage more, of a budget do you needed?

SCHAPIRO: Well, I there are 3,600 people at the SEC. We regulate about 35,000 industries. That’s a pretty bad ratio. We could be multiple times larger than we are. We can’t grow that fast, that big, that fast. So over the next several years I’d like to see the agency expand very significantly.

CLAMAN: How much money do you really need?

SCHAPIRO: We need significantly more money, I think, than we have at the moment. I will say the administration has been tremendously supportive of our budget requests. And Congress has been very supportive. So, I actually feel pretty good that we’ll be able to get the resources that we need over time.

Hard for me to give you an exact number. But I would say we need to grow pretty significantly. Let me give a rough example. We have about

425 examiners, who are responsible for 8,000 mutual funds, where most Americans have their wealth, and 11,000 investment advisors. Those aren’t good numbers.

CLAMAN: We need more.

Let’s talk about specific trading. Attempts, and different things that have hit the markets. High frequency and flash trading, this is in the crosshairs right now. Some people say that it really puts the retail or little-guy investor at a total disadvantage, this super-fast trading. Will you move to either curb or ban high frequency and/or flash trading?

SCHAPIRO: We are certainly going to look in the short term at flash trading. I’ve asked the staff to make a recommendation to me for how we might eliminate the inequities that are created by flash trading. With respect to high frequency trading that will be part of this broader review we’re doing of the markets to include dark pools, co-location, high-frequency trading and some of the other really recent innovations in the marketplace that have created this asymmetry of information and access for retail investors versus institutional investors. At the same time, we don’t want to squelch innovation. We don’t want to slow markets down in appropriately. But we want to make sure that we have a handle on all of these different innovations.

CLAMAN: People, and some would argue you, because you gave a speech in the ’90s that said similar things about derivatives. Saying we don’t want to squelch innovation. And frankly, it was the unwinding, disastrous unwinding of derivatives in September that really caused the financial crisis, or much of it. How do you strike that balance between oh, we want to keep it an innovating force, to come on, we’ve got regulate here and make sure that things don’t implode in our face?

SCHAPIRO: Well, we clearly have to regulate. We have vast swathes of marketplace, like credit default swaps, and other over the counter derivatives, that are unregulated. Hedge funds are unregulated. Those kind of institutional products must be brought under the regulatory umbrella.

CLAMAN: Hedge funds? You want to regulate hedge funds?

SCHAPIRO: I think it’s necessary to regulate hedge funds. I think they are too big a part of the marketplace for the SEC and the federal government not to have a handle on the impact they’re having on the market, the strategy they’re employing. It’s time for that.

CLAMAN: How would you regulate a hedge fund?

SCHAPIRO: First of all, we need to have them registered, so we understand who is in the space and what they’re doing. We need information so that, to the extent they could be engaging in manipulative activities, insider trading, we can constrict. Reconstruct trading practices and patterns so that we can bring those cases and enforce the rules against manipulation and insider trading.

So we really need reporting. We need registration. We need the ability to examining their books and records, and understand how they’re conducting business.

CLAMAN: The market genetically mutates. You know this. You shut one door, they find a way to come in a different window. How can you be ahead of the curve when it comes to what — you called it innovation?

SCHAPIRO: Well, I think it’s building the right skill sets here at the SEC to understand what it is that the rocket sciences are designing on Wall Street and how those other products and strategies are being employed. That means a much greater focus on risk and looking around the corners than we’ve really had here before.

The agency is so focused on the day to day reviewing of public companies, bringing enforcement cases, writing the rules that govern how money market funds are going to be made more resilient after the economic crisis. On a day to day basis, we’re dealing with so much, we need a dedicated group of people who are thinking about how the world is changing, connecting the dots, and then helping us prepare a regulatory response in virtually real time. Maybe we’ll never get to real time, but be much more on top of things as they are happening in the industry.

CLAMAN: Naked short selling; I had a fund manager ask me yesterday, when is the SEC going to start enforcing the rules to prevent people from abusing naked short selling? I know there are rules in place, but enforcement.

SCHAPIRO: We actually did some cases in the last couple of weeks.

CLAMAN: How many?

SCHAPIRO: Oh god, probably just two cases that I can think of off the top of my head in the last couple of weeks. We are going to enforce those rules, as we’re going to enforce all of our rules in a more aggressive way. Of course, we’ve proposed some regulatory responses.

We made final in the last month on rules with respect to the failure to deliver on short positions. Those rules have been credited with really bringing down failed to deliver by about 56 percent. So those are tremendous positive steps.

We’ve also proposed some market-wide price caps that would slow the decent of the market caused by short selling, or some circuit breakers, as an alternative, where an individual stock declines by more than a certain percentage on a day. A circuit breaker would kick in and no more short selling would be permitted in that stock.

CLAMAN: Why not just reinstate the uptick rule?

SCHAPIRO: We proposed that as an alternative and asked for comment on that. We’ve got thousands of comment letters on all of these multiple proposals that we’ve put out. There’s a concern about whether — in this new market environment, whether the old uptick rule really can work. We want to put into place something that’s going to be effective, not something that just sounds good because it existed in the past.

So that’s why we have proposed multiple different approaches to dealing with short selling. Over 4,000 comment letters about this point. And we’re working through them to see what the right approach will be.

CLAMAN: Will institute margin and capital requirements for these exotic derivatives? I mean, if somebody wants to buy stock long, they’ve got to have a margin. It’s unbelievable to a lot of people that there aren’t margin requirements. Yet others dig their heels in and say, that’s the worst thing they could do.

SCHAPIRO: My view is that if Congress passes legislation similar to what was proposed by the administration to regulate over-the-counter derivatives, a hugely important component of that is regulating the derivative dealers. That means capital requirements and margin requirements to collateralize those positions. Yes.

CLAMAN: Let me go back to high frequency trading. Co-locating, when people a lot of money to participate in fast, high speed trading; are you going to look to maybe crimp that a bit?

SCHAPIRO: We’re going to look at co-location, certainly. There’s a fundamental requirement in security laws about fair access to the market. Co-location brings to mind that kind of question. We will be looking at co-location in the context of this broader market structure that we’re dealing with.

CLAMAN: Because you’ve got the New York Stock Exchange building some behemoth out in New Jersey, 400,000 square foot floor, just to compete in this high frequency trading atmosphere. There is a portion set aside for co-locators.

SCHAPIRO: Right, definitely.

CLAMAN: Does that worry you?

SCHAPIRO: Sure. That’s a reason why we want to look at this very carefully and assure that there is fair access.

CLAMAN: But isn’t it the free market at work?

SCHAPIRO: That’s the balance. This is a regulators lot in life, is to balance the need for innovation, because there has been a lot of phenomenally good innovation. (INAUDIBLE) great financial innovation of the last century. There are lots of important financial innovations.

We don’t want to squelch those.

But, at the same time, I think there’s been a lot of innovation that hasn’t served anybody at all, except the people who created it and then were able to charge fees to offer it generally to the public. So we have got to find the right balance. That’s a lot of what we do. That’s why we put our rules out for comment before we make them final. We want to hear both sides of this.

But we have to err on the side, at the SEC, of market integrity, protecting investors. That may mean that not all innovation is going to be good.

CLAMAN: The proxy access rule, corporate government — this is a rule that would let share holder groups put their candidates for boards onto the company’s proxies at the company’s expense. With your support and your vote, this thing could pass. Will you pass it?

SCHAPIRO: I don’t know if we’ll pass it. Again, out for comment at the moment. Comment period closed last week. Last time I checked, there were over 500 incredibly thoughtful comment letters on this issue broadly, and also on the specifics of how the SEC structured the proposal. So we’re working our way through those, and we’ll see where the commission lands.

I personally am committed to facilitating share holder access to proxies.

CLAMAN: Companies take this though — they say, you let every Tom, Dick and Harry in here make their comment about who should sit on the board and you’re going to trip up commerce.

SCHAPIRO: Well, I don’t think our proposal would let, in fact, every Tom, Dick and Harry have access to the proxy. But if you take a step back and remember who owns these corporations, it is the share holders.

And the share holder franchise is a really important part of how corporations are overseen and run. Access and having a meaningful vote about who serves on the board is important. That’s our goal.

Whether we’ve got it exactly right in the mechanics of how we’ve done it, that’s what the commentators will tell us. And we’ll go forward.

CLAMAN: Let’s talk about oversight. Treasury Secretary Tim Geithner really pushing to have the Fed be, as the “Wall Street Journal” calls it, the financial super-cop. You’ve made it clear you don’t think that’s the greatest idea. Is that still your stance?

SCHAPIRO: I have a kind of nuanced idea. We actually support a systemic risk regulator. I’m comfortable with that being the Fed. What I would like to see that is slightly different from the Administration’s proposal is that the counsel be a bit more empowered.

I think the diversity of perspective and view and expertise that we will get from having a counsel, FDIC, the Fed, the SEC, the CFTC, the OCC, participating on it will be a very important part of understanding the math of projection risks that exist. So I would like to see the counsel stronger that was proposed in the Administration’s plan. But we also support, in addition to a strong counsel, a systemic risk regulator.

CLAMAN: Okay, we all heard about the meeting in early August where barnyard epithets were flying, and that Tim Geithner apparently got very hyped up and, frankly, aggressive with you and other organizers and saying, come on, let’s just get this at this power. Is he trying to emasculate the SEC?

SCHAPIRO: I don’t think so. I actually think that there is a lot more agreement about how to go forward on systemic risk, on consumer protection, on resolution, on all of the major issues playing out on regulatory reform than there is disagreement.

And I think it is frustrating, obviously, to have lots of differences of opinion on specific issues, but I feel the process is about to my way of thinking. That is why we have had so many Congressional hearings. That is why we have robust debate. But at the end of the day, I think there is far more agreement among the regulatory community than there is disagreement.

CLAMAN: Do you think the CFTC and SEC should merge? You have said it before.

SCHAPIRO: Well, I have said before that I think there is a real logic and efficiency that could be achieved by a merge of the two agencies. I don’t think that is in the cards anytime soon, so the CFTC Chairman and I are very committed to working together to close the regulatory gaps and to harmonize the risks as possible, our two regulatory regimes. And to that end, next week we are holding joint hearings where we will hear from market participants and others what they think the issues are between the two separate regulators that we should tackle.

CLAMAN: You are being diplomatic, as I hear it, and you are saying there is more agreement than disagreement about giving the Fed more power, but this thing is getting held up. We have not seen the Fed get that full power granted to it. How long will you hold out before you get what you feel is right and that is that other entity that is able to have more power than just a recommendation type of role?

SCHAPIRO: Well, I think, obviously, at the end of the day it is going to be up to the Congress how to structure the regulatory system. And I think what you hear from members is a deep appreciation that we must have better controls over the risks in our system, and appreciation that all of the regulators bring a different perspective and something important to the table, an understanding of the institutions of the regulate or the products that are offered by the institutions of the regulate.

And I think Congress is in the process, much as well all are, trying to get the balance right. And you have to go back to what I said earlier, getting the balance right is really what it is all about in regulation.

CLAMAN: How is that relationship with Tim Geithner now? Is there tension?

SCHAPIRO: No. It is just fine. It is very positive. We have a great working relationship.

CLAMAN: Okay, let’s get to Bernie Madoff. You were not running the SEC when whistleblower Harry Markopolos came out and gave about 50 different hints about exactly how to find this problem and to shut it down.

You have said, though, back in February, that you would give Congress a full account of what happened at the end of the summer. We are getting close to the end of the summer. When do they get that account?

SCHAPIRO: Well, they will get that account. The Inspector General of the SEC has done a very thorough review, and that review will be made public in the next several weeks and provided to Congress.

But it is very important that while we waited for this review that we have not waited for this review in order to make some pretty fundamental changes in the Securities and Exchange Commission as a result of what we understand to have happened with respect to Madoff. So we have proposed new rules to try to protect the assets of customers much more thoroughly than they were protected under the old regime.

We have brought in the Center for Enterprise Modernization to help us develop a system to better manage those almost 1.5 million tips that this agency gets every year. We have brought in new leadership enforcement in the other parts of the organization.

We have restructured the enforcement division in a much greater focus on bringing cases faster and bringing the higher impact cases. We have engaged in lots of new training for our employees so that they can stop fraud much more quickly, raise the red flag earlier, pursue those cases more aggressively. Everything we have thought to do, we have done to try to respond to the fallout from Madoff, and hopefully, prevent something like that from ever happening again.

CLAMAN: A lot of people hope that. We have only got a few more minutes, so I want to get to fines. A Federal Judge has just, in essence, smacked down your Bank of America $33 million fine that was involved — the Federal Judge just smacked down the $33 million fine that the SEC handed to Bank of America for misleading investors about the Merrill deal. His issue is that you did not name individual names that you just went with the company, let’s move on. Why didn’t you name names?

SCHAPIRO: Well, let me speak generally to this issue, because it is always a fact that circumstance is kind of analysis that we do, in every single case. Some cases we name individuals. Some cases we only name corporations. Some cases we only name individuals.

It really depends on the facts and circumstances of that matter and evidence that we have that allows us to go ahead and pursue, because we start with every investigation on the assumption that we won’t have a settlement that we will actually have to litigate the case. And that is the kind of inquiry that was done with respect to Bank of America, Merrill, and it was with respect only to the bonus payments and whether they were adequately disclosed in the company’s proxy on the transaction.

CLAMAN: If the judge were to agree to this fine, is the investigation over? Is that all there is?

SCHAPIRO: Well, I won’t comment on what kind of other investigations we may have ongoing.

CLAMAN: With Bank of American and Merrill Lynch.

SCHAPIRO: Right. I won’t, I can’t comment on that.

CLAMAN: In just half a year you have squeezed about $6.5 billion in fines out of entities and individuals. Fortune Magazine actually called that peanuts. They say you got $50 million out of General Electric. It is a $150 billion company, $15 million from Hank Greenberg, formerly of AIG. He’s a billionaire. What do you say to that?

SCHAPIRO: What I would say to that is that the size of the company is a relevant matter for us to inquire about, but our fine has to be based on the conduct that violated the securities laws. So, in the General Electric case, it was an accounting fraud issue and the fine has to be measured by the violation of the law, by the conduct.

So it is a little bit unfair, I think, to say that it is a huge company, therefore the fine should be huge. That is not really how the inquiry and the analysis is done. I think we have shown an enormous amount of aggressiveness in both the kinds of cases we are bringing, the numbers of cases, and the penalties that at the end of the day we are earning in those cases.

CLAMAN: Your legacy may very well be how you looked inward and not necessarily outward at the markets, how you looked at the SEC, and that how could the gaping hole that allowed Bernie Madoff to walk through when there were so many warnings. How could that have happened and how will you change it? What is the legacy you want?

SCHAPIRO: I would to bring the SEC at the end of my term with a deep dash, a real driving commitment to protecting investors, which exists in this agency already. It just needed to be unleashed a little bit. With a very solid regulatory regime, that covers those parts of the marketplace that have been exempt from legislation historically.

I want to unleash the capability that I know is here. I want to augment it with some new skill sets, new technology that allows us to keep up with the marketplace. I want to walk out with people, investors believing there is an SEC on the watch; there is an entity that’s out to protect their interests, and to be their advocate.

That’s our historical roots. That’s what we have to return to. We need to do it through our enforcement, through our rule making, through our examination programs. It’s got to inform everything we do.

CLAMAN: Should the businesses and markets be scared of you?

SCHAPIRO: They shouldn’t be scared, but they should be respectful of the Securities and Exchange Commission’s role in enforcing the law and protecting the marketplace from fraud and other abuse.

CLAMAN: Chairwoman Schapiro, thank you very much for joining us.


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5 Comments on SEC Chair Schapiro: The Agency Lacks the Tools to Get the Job Done

  1. Decimal Place Trading caused the recession of 2008
    This recession was caused by the manipulation of stock prices on Wall Street through naked short-selling, flash trading, high-frequency trading, secret software, super-fast computers and what I feel was the main cause of this corruption: “Decimal Place Trading.” As I write this article today, much of this corruption is now slowly coming out through social media outlets such as Twitter and Facebook, along with bloggers on the internet, Yahoo bulletin boards, and the movie Stock Shock. The news media is also to blame for what has taken place in this country — including the near-collapse of Wall Street and the banking industry.
    There are many things to point fingers at or place the blame on, and I can think of a few off-hand that I would like to cover — the first being Wall Street’s regulation changes. I am no expert — I am not even a writer — but decided to tell this story since the business news media was not telling it. These Wall Street regulation changes contributed to the aforementioned problems in many ways, with the first being the removal of fractions in stock pricing. On January 29, 2001, the New York Stock Exchange, or NYSE, went to four-decimal-place trading. On March 12, 2001, the National Association of Securities Dealers Automated Quotation, or NASDAQ, followed suit. This new rule had the best of intentions as we headed toward the computer and digital world, but over time it was manipulated and companies like Goldman Sachs figured out how to take advantage of the new system. I am not sure how it happened, whether it was lobbied for years or what — but along came the biggest mistake of all with the elimination of the uptick rule in July of 2007. This rule had been implemented after the great depression, and had been in place since 1938. How could the Securities and Exchange Commission, or SEC, abolish a rule that had been in place for close to 70 years, and had worked? Put these two changes together, and you get a simple equation: greed plus corruption equals recession.
    Reports have been released on the web that Goldman Sachs made over 100 million dollars per day in 46 out of 64 trading days in Fiscal Year 2009, second quarter (April, May and June). Let me say that again. They made over 100 million dollars per day, and are still doing it as I write this letter today. But the question remains, how did they do it? There has been no report of this by any of the news media. How can this be? This corruption is 100 times the gravity of the Bernie Madoff story, and yet there has been no coverage by CNBC or Bloomberg News. Why? Goldman Sachs, upon Wall Street transitioning to fractions and the abolishment of the uptick rule, designed secret software and used this software to gain an advantage on every potential investor. Basically, Goldman Sachs became a Las Vegas poker dealer in New York City on Wall Street, turning profits on investors every trade with their super-fast computers and software.
    Richard Keane August 26th, 2009 Revised version

  2. we as investors will never win, you are absolutely right,this is the stock market and i believe it is all manipulated,I am still down on my investments i hope someday they may come back,i wish everyone the best and you also,thanks! i

  3. I am not impressed. Mary Schapiro seems to be doing the bureaucratic dance, instead of directly and proactively attacking the problems. There are already regulations in place to stop the counterfeiting of shares by selling and not delivering the shares sold. It is easy to require the participants to report on a daily basis the total of all long shares held by brokers in street name. This total would make it absolutely clear what stocks have phantom shares in circulation. But guess what? That’s precisely why they don’t want to disclose this number.

  4. Maria,

    You are exactly right, us as in investors will never win. I started looking at other investments outside the marketplace. The SEC needs to do a better job. The Madoff scandal really woke up the SEC, now they just need the money to stop the manipulating.

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