Schapiro's endgame

Mary Schapiro is nearly four years into her term as chairman of the Securities and Exchange Commission. She may not see a fifth. Speculation is mounting inside the beltway that, regardless of who wins the November election, Ms. Schapiro is on her way out — probably of her own accord. “Who could blame her for leaving?” asked Barbara Roper, director of investor protection at the Consumer Federation of America. “She's operating under incredible pressure, and I think she'd be the first to say she's disappointed with her legacy.” Ms. Schapiro declined to comment for this story. Whether anyone can lead the commission effectively in the current political climate is an open question. But the agency's momentum has stalled, and signs of acrimony among the five commissioners (most recently on the money market mutual fund issue) don't reflect well on her leadership. “Like Obama, Mary Schapiro came into office when everything was a mess,” said Lynn Turner, a former chief accountant with the SEC who now works as a managing director at consulting firm Litinomics Inc. “She has had a very difficult job to do. But she has also had extraordinary opportunities to make her mark, and she hasn't — she's blown it.” The agency has had a healthy share of missteps on Ms. Schapiro's watch. One of the biggest and most embarrassing of those was SEC General Counsel David Becker's questionable role in handling deliberations on the payout for victims of Bernard Madoff. When his mother died in 2004, Mr. Becker inherited and liquidated a $2 million account that she had held with the Ponzi schemer, yet was cleared by an SEC ethics officer and Ms. Schapiro to work on the Madoff case. Then there was the signing of a $557 million lease for huge amounts of office space in Washington in anticipation of a large budget authorization under the Dodd-Frank reform law. The SEC didn't get all the money and, as a result, needed only about a third of the space. The SEC has also suffered some humbling legal setbacks, including on the proposed proxy access rule, which would have let shareholders more easily propose resolutions on corporate proxies. The federal judge in the case chastised the SEC for failing to consider the proposal's costs adequately. The withdrawal of reform proposals for money market mutual funds last month, however, marked a new low for the SEC under Ms. Schapiro. She not only lost a lengthy, high-profile battle with the fund industry but managed to alienate a key ally, Democratic commissioner Luis Aguilar, in the process. “She tried to turn the heat up on Aguilar and all she did was make him mad,” Mr. Turner said. “I don't disagree with the changes she was proposing, but she misplayed her hand badly.” Although another financial regulator may take up the matter, the events were a blow for the chairman and the SEC. “It doesn't serve anyone's purpose to have the agency appear to be dysfunctional,” said Harvey Pitt, a former SEC chairman who is now chief executive of consultant Kalorama Partners LLC. “It wasn't one of the SEC's better days.” The commission's struggles extend beyond one issue, however. Increasingly complex financial markets and the bitterly partisan backdrop to securities regulation after Dodd-Frank have made overseeing markets almost impossible. If the SEC isn't being bullied by Congress, it is being threatened by the investor community.

DIFFICULT CIRCUMSTANCES

Steven Wallman, a former SEC member and chief executive of brokerage firm Foliofn Investments Inc., questions whether markets can be supervised adequately in this era. “Between Madoff and market structure issues, high-frequency trading and the abyss of the financial crisis, one could ask whether regulators are capable of effectively regulating anymore,” he said. “Under the circumstances, I think she's done a great job.” There is no question that Ms. Schapiro has earned her bona fides as an experienced regulator and investor advocate. Her regulatory career began in 1988, when she was appointed to the SEC by President Ronald Reagan. President Bill Clinton named Ms. Schapiro acting SEC chairman and later chairman of the Commodity Futures Trading Commission. She became president of NASD Regulation Inc. in 1996, ultimately becoming chief executive and overseeing its merger with the NYSE regulatory arm to form the Financial Industry Regulatory Authority Inc. in 2007. Ms. Schapiro served as Finra's chief executive until her appointment to the SEC.

"IN THE DOGHOUSE'

She took the helm at the SEC under perhaps the most difficult conditions a chairman has ever faced. “The SEC was in the doghouse after the financial meltdown and the Madoff scandal,” said James Angel, an associate professor of finance at Georgetown University. “She inherited a demoralized agency, on the chopping block, and protected it through the Dodd-Frank deliberations.” The Dodd-Frank reform law charged the SEC with writing an unprecedented number of regulations on market structure, corporate governance and financial industry oversight. It directed the SEC staff to conduct scores of studies on matters that included the potential drafting of a universal fiduciary standard for financial advisers and initiating stronger oversight of registered investment advisers — neither of which have been acted on. “I thought the Sarbanes-Oxley Act was tough, but it was a walk in the park compared to Dodd-Frank,” said Mr. Pitt, who had been SEC chairman for just 18 months when President George W. Bush replaced him with William Donaldson. While virtually all SEC watchers give Ms. Schapiro high marks for defending the agency and tackling her enormous workload, her pro-gress on rule making has stalled. That is largely a result of the increasingly rigorous cost-benefit analysis expected on proposed rules. While not required by statute to perform such analyses, Ms. Schapiro committed the SEC to the effort after the agency's proxy access rule was struck down last summer. The court's judgment that the SEC had not sufficiently accounted for potential costs was followed by a report from the Inspector General's Office making the same criticism more broadly. The agency's rule-making efforts have been bogged down ever since, said Jeff Mahoney, general counsel at the Council of Institutional Investors. “The SEC is tied in knots over this,” Mr. Mahoney said. “A new chairman could argue that we need effective rule-making. Someone has to make that pitch, but as long as [Ms. Schapiro] is chairman, the agency is stuck,” he said. It's a particularly bad sign that investor advocates such as Mr. Mahoney and Ms. Roper at the Consumer Federation are getting impatient with Ms. Schapiro. “I'm sympathetic to the horrible conditions she's operating under, but it's not an adequate excuse,” Ms. Roper said. “The [SEC] policy that governs cost-benefit analyses makes it nearly impossible to adopt rules that the industry opposes. If that's the case, the SEC might as well just shut its doors.” It's more likely that it will just try a new chairman. aosterland@investmentnews.com Twitter: @aoreport