From the August 01, 2011 issue of Futures Magazine • Subscribe!

Mary Schapiro: In the eye of the storm


FM: You came to the SEC after arguably the greatest and most embarrassing regulatory failure in history as the SEC failed to spot the Bernard Madoff Ponzi scheme. How have you addressed this in terms of regaining public confidence and ensuring you discover other frauds much earlier?

MS: We have undertaken very extensive reforms across the agency to ensure that something like that can’t happen again. Obviously no regulator can prevent every fraud, but we have streamlined our enforcement procedures, we brought new leadership across the agency, we created specialized units in our enforcement group to become expert and able to move quickly, we implemented risk-based examination to focus on registrants whose business models or practices create the greatest risk, we brought in a lot of new skill sets, we have tried to breakdown the internal silos and we revamped the way we handle tips and complaints, which was key in the Madoff scandal. We increased training dramatically and we put in place a lot of new regulatory requirements that should help prevent something like this from happening again. These are the new rules related to surprise inspections of investment advisors that custody assets at an affiliated entity so that we can ensure that the assets that they say exist really do exist and have been separately audited. We have a whole section of our website that we call post-Madoff reforms that people can go to and see all of the extensive efforts we have undertaken to try and address the failure of the agency in that regard, why these things happened and how we are working to ensure that they never happen again. There is also a section on all of our Dodd-Frank implementation, what our schedule is and what the status of everything is, [as well as] all of the comment letters.

FM: There is quite a bit of public anger over the fact that nearly three years after our banking and credit system stood at the brink of failure, there have been no criminal indictments. I know you can not talk about any specific investigations but talk about what steps you have taken? We know you reached a settlement with Goldman Sachs over marketing certain CDOs and more recently with Morgan Keegan & Company and JP Morgan. Do you anticipate more of these cases coming to light?

MS: We have a reasonably full pipeline of post-financial-crisis cases and we have actually brought cases involving more than 70 firms and individuals coming directly out of the financial crisis including one this week—another JP Morgan case—for bid rigging in the municipal securities market. We are going to continue to bring these cases out. I understand the public anger but I should say the SEC, like the CFTC, does not have criminal authority. We can’t put people in jail, we can’t criminally prosecute them; what we can do and what we have done is bring very tough enforcement cases, try and get money back and into the hands of harmed investors and then bar people from working in the industry who have really contributed to the violations by their firms. Last year for example — this isn’t all coming out of the financial crisis — we returned $2.2 billion to investors in disgorgement off of a total SEC budget of $1.1 billion, so we are a pretty good value in that we returned $2 to investors who were harmed for every $1 of the entire SEC budget as well as assessing very large fines.

FM: Do these cases just take that long or was there a failure to look at what people were doing with these derivative products?

MS: The cases are complex to bring after the fact. They are hard to do but we have a great team working on the structured products cases as well as the accounting and disclosure issues with respect to a wide range of financial crisis cases. The way we approached a lot of these cases is the inadequacy of disclosure. If you look at a couple of the cases we brought, you’ll see a failure to disclose to investor what was the deteriorating quality of the securities that were being sold.

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