Schapiro leaves SEC as prolific rule-maker and agency protector

As Mary Schapiro steps down as chair of the Securities and Exchange Commission (SEC), her greatest accomplishment will be shepherding the SEC through the implementation of Dodd-Frank, many believe.

As Mary Schapiro steps down as chair of the Securities and Exchange Commission (SEC), her greatest accomplishment will be shepherding the US regulator through the implementation of Dodd-Frank, many believe.

Schapiro’s departure is no surprise given she had publically stated on a number of occasions that she would not continue in the role after the presidential election earlier this month.

Her tenure began in January 2009 at a nadir in the agency’s reputation after Bernie Madoff was arrested in December 2008 for carrying out wholesale fraud right under the agency’s nose and large institutions 'too big to fail' were being bailed out by the government.

Schapiro was originally appointed to fill one of two Democratic seats on the SEC in 1988 by President Ronald Reagan. George Bush reappointed her in 1989 and Bill Clinton appointed her acting chairman of the SEC, and then chairman of the Commodity Futures Trading Commission in 1994.

By 1996 Schapiro was president of regulation at the National Association of Securities Dealers, now the Financial Industry Regulatory Authority (FINRA).

By many accounts, one of Schapiro’s best hires was Robert Khuzami as enforcement chief, toughening up a department which had been heavily criticised for its lack of bite during the Madoff affair and the financial crisis. In 2010, Khuzami obtained a US$550 million settlement from Goldman Sachs for securities fraud. In 2011 the SEC brought a record 735 enforcement actions. According to the SEC, the agency has brought 129 enforcement actions against individuals and entities which directly contributed to the financial crisis, to the tune of US$2.6 billion in fines.

Prolific rule-maker 

In Schapiro’s four-year term (a tenure longer than 24 of the 28 previous office holders), she has accomplished much in the way of capital markets rule-making. She has experienced one of the busiest drafting periods in decades. The agency has proposed or adopted about 80% of the rules required by the Dodd-Frank Act, including adopting 36 rules, proposing more than 39 other rules and conducting 15 studies for the Act. It has proposed an entirely new regulatory regime for the previously unregulated derivatives market.

“Chairman Schapiro has worked tirelessly during her tenure at the SEC to tackle difficult challenges and work through a massive rulemaking effort mandated by Dodd-Frank,” said Tim Ryan, president and CEO of buy-side lobby group, the Securities Industry and Financial Markets Association. “She has been an effective steward of an agency that plays a key role in regulating our financial markets and has been actively engaged to ensure rules are written that strengthen and protect our markets and investors active in them while not stifling market activity, capital formation, and economic growth.”

And in an equity market structure concept release in January 2010, which became the basis for many of the agency's new rules, the SEC examined whether the market structure promoted capital formation in companies with varying levels of market capitalisation.

The release asked specific questions about the best way of measuring market quality, the fairness of the market structure, whether high-frequency strategies are beneficial or harmful for investors and whether co-location gives proprietary trading firms an unfair advantage. It also asked whether the trading volume on non-displayed venues had reached a level where they detracted from the quality of public price discovery.

Schapiro also had to deal with the fallout from the 6 May 2010 'flash crash' where an algo trade deployed by a mutual fund sent US markets tumbling in the space of 20 minutes, before rebounding just as quickly. The event suddenly brought the stability of market structure under the limelight.

Under Schapiro, the SEC response to the flash crash was the development of market-wide circuit breakers to help limit the impact of technology errors in the market and a 'limit up-limit down' mechanism which prevents trades in individual exchange-listed stocks from occurring outside of a specified price band. The agency has clarified how and when erroneous trades would be broken and required broker-dealers to put in place risk controls, effectively prohibiting unfiltered access to the exchanges. Furthermore, the SEC also recently approved the first-ever consolidated audit trail system, requiring the exchanges and FINRA to submit a comprehensive plan for developing, implementing, and maintaining trading data that would help the regulator keep track of market activity. 

“Mary Schapiro will undoubtedly be remembered for taking an activist role as a regulator, particularly with respect to the Dodd-Frank Act and the development of consumer protection measures,” said Sean Owens, director of fixed income and derivatives at financial consultancy Woodbine Associates.

Yet Schapiro’s report card is not all positive. 

Concern about the increase of trading in dark pools led the SEC in October 2009 to propose a three-point plan lowering the threshold at which alternative trading platforms must display bids and offers to 0.25% of a stock's average daily volume from 5%, introducing real-time disclosure of executions by all venues, and bringing reporting in line with registered exchanges. However, the rules are yet to be adopted into law. 

The so-called Volcker Rule ban on prop trading by deposit-taking institutions is yet to be completed to the industry’s and public’s satisfaction. Attempts to curb naked short selling floundered for years. Even the 2010 ‘flash crash’ and subsequent mini crashes like Knight Capital have left the agency exposed for its lack of capability.

New beginnings?

Current SEC commissioner Elisse Walter will take over as designate chair when Schapiro steps down.

“I am deeply honoured and humbled to be the SEC’s next chairman and to continue to serve alongside the talented and dedicated SEC commissioners and staff who work tirelessly on behalf of America’s investors,” Walter said in a statement.

Beltway pundits and industry analysts believe Walter is unlikely to veer too far from Schapiro’s policies and priorities. Known as a close confidant of Schapiro’s, Walter has rarely voted differently to Schapiro on new rules and enforcement verdicts.

“[Walter’s] depth of knowledge of securities regulation and the markets and abiding concern for American investors will provide her a sound foundation as she leads the agency forward,” said Richard G. Ketchum, chairman and CEO of FINRA.