SEC Head Outlines Changes to Agency

Securities and Exchange Commission (SEC) Chair Mary Schapiro, testifies on Capitol Hill in Washington, March 11, 2009, before the House Appropriations subcommittee hearing on the SEC and the financial crisis. (AP Photo/Manuel Balce Ceneta)
AP Photo/Manuel Balce Ceneta
The Securities and Exchange Commission has been revamping itself, buttressing enforcement efforts and taking a series of initiatives to protect investors in the wake of the financial crisis and massive Madoff fraud, the agency's chairman said Tuesday.

The agency has undergone fundamental changes "that will reinforce our focus on investor protection and market integrity," SEC Chairman Mary Schapiro testified at a House hearing.

Appointed by President Barack Obama, Schapiro took the helm in January of an agency demoralized and widely assailed over its failure to detect Bernard Madoff's Ponzi scheme for many years despite red flags. The SEC also was criticized by lawmakers and investor advocates for its oversight of Wall Street investment banks in the period leading up to the financial crisis that erupted last year.

"In the wake of the Madoff fraud, I believe we owe it to investors to show them that we can and will adapt our ways and learn from our past errors so that we do not repeat them," Schapiro said.

Schapiro has taken steps aimed to strengthen and speed the agency's enforcement efforts and installed a new enforcement director.

Lawmakers voiced approval of Schapiro's actions but several expressed frustration that there wasn't a more thorough housecleaning of officials deemed responsible for the Madoff failure.

"We have to hold people accountable at all levels of the agency," Schapiro said. "We've tried to pull all the lessons we can from those failings."

The House panel seemed willing to increase funding for the SEC's budget, which Schapiro said was needed for the agency to have sufficient staff to police burgeoning and sophisticated markets.

The House is considering an increase of 8 percent in the SEC's proposed $1.03 billion budget for the fiscal year starting in October. But Rep. Paul Kanjorski, chairman of the House Financial Services subcommittee on capital markets, said Congress must seriously consider the SEC's request to boost its $1.2 billion budget for fiscal 2011 by an additional 20 percent.

A series of regulatory actions by the SEC commissioners in recent months have included restricting short-selling in down markets, strengthening oversight of mutual funds, tightening scrutiny of investment advisers and making it easier for shareholders to seat directors on company boards.

Schapiro said that restraining short-selling was the most widely and fiercely debated issue that has come before the agency during her tenure. The SEC has opened a public discussion on possible ways to restrict the practice of making trades that bet against a stock, which is legal and widely used on Wall Street.

Investors and lawmakers have clamored for limits on moves they say worsened the market's downturn. Short-selling involves borrowing a company's shares, selling them, then buying them back when the stock falls and returning them to the lender. The short seller pockets the difference.

The SEC also is working to identify emerging risks to investors, including so-called "dark pools," or automated trading systems that don't publicly provide price quotes, Schapiro said.

"Given the potential risks posed by dark pools, the (SEC) will take a serious look at what regulatory actions may be warranted to respond to the potential investor-protection and market-integrity concerns that dark pools may raise," she said.

Last week, the Obama administration sent Congress legislation designed to protect investors by bolstering the SEC's authority. The proposal is part of the sweeping plan for overhauling the U.S. financial rule book that the administration is pressing lawmakers to enact to help avert another meltdown. It seeks to put investment advisers providing services to retail investors and stockbrokers under the same standards of conduct, and to strengthen rules governing the timing and quality of disclosures by investment funds.