WASHINGTON - Securities and Exchange Commission chairman Mary Schapiro says she is taking several steps to bolster the SEC's enforcement program and wants to address the inherent conflicts of interest inherent in the issuer-pays model at rating agencies. Meanwhile, a deputy director is pledging the agency will bring more muni cases this year.
Schapiro and deputy enforcement director George Curtis talked about the initiatives Friday at the Practising Law Institute's annual SEC Speaks conference. Curtis said the SEC's municipal enforcement working group plans to file enforcement cases involving manipulatory practices, insider trading, and disclosure failures in the municipal market. Reached later, he said that the focus of the cases would revolve around disclosure failures in the municipal market.
While other SEC officials in the past have predicted increases in muni enforcement cases that did not occur, Curtis' remarks come as the SEC has been investigating allegations of bid-rigging and other abusive practices tied to guaranteed investment contracts and municipal derivatives.
Speaking publicly for the first time since she was sworn in as the head of the SEC Jan. 27, Schapiro said she is eliminating a two-year "penalty pilot experiment," which has required the enforcement staff to obtain a special set of approvals from the five-member commission in cases involving civil monetary penalties for public companies that engaged in securities fraud.
The SEC chairwoman said the enforcement staff has told her the pilot has caused "significant" delays in the process of bringing a corporate penalty case, discouraged staff from arguing for a penalty in cases that might have deserved one, and sometimes resulted in reductions in the size of penalties.
"At a time when the SEC needs to be deterring corporate wrongdoing, the penalty pilot sends the wrong message," she said, adding that removing it will "ensure that justice is swiftly served" to firms that commit "serious acts of securities fraud."
Schapiro also said that she has expedited the process for the enforcement staff to obtain permission from commissioners to launch formal investigations, which come with the power to subpoena witness testimony and the production of documents. Until recently, many formal orders of investigation had to be subject to a full review at a meeting of all five commissioners, and had to be placed on a calendar weeks in advance.
But under recently implemented changes, the commissioners will be able to separately sign off on permission slips for formal investigations, she said, adding, that in some cases a single commissioner acting as "duty officer" will be able to approve them. "In investigations that require use of subpoena power, time is always of the essence, and every additional day of delay can be costly," she said.
While pledging to take additional steps to bolster the enforcement staff, Schapiro also called on the securities industry to reform its business practices to help restore "appalled" investors' confidence in Wall Street.
"A strong and reinvigorated SEC will be on the beat like never before to catch wrongdoers," she said. "But there needs to be a new era of responsibility on Wall Street and throughout our markets to ensure that wrongs don't occur in the first place."
"The sooner that Wall Street works to repair its own problems, the sooner investors will once again find the confidence to invest in what should be the finest markets in the world," she added.
Schapiro also listed several priority initiatives, including improving the quality of credit ratings and limiting the impact of credit ratings on broker-dealers' capital requirements. She also pledged to try to reduce systemic risk to investors and markets, including through centralized clearinghouses for some derivatives products like credit default swaps.
Meanwhile, the SEC announced Friday that Schapiro has tapped David Becker to become general counsel and senior policy director to coordinate legal cases and advise on enforcement actions.
Becker, who will re-join the SEC later this month, is currently a partner at Cleary Gottlieb Steen & Hamilton LLC. He previously served as general counsel from January 2000 to May 2002 under former SEC chairmen Arthur Levitt and Harvey Pitt, helping to shape most of the SEC's major policy and regulatory initiatives. He was the deputy general counsel before that.
Schapiro is said to be searching for additional candidates to fill other top positions, including a new enforcement director to replace Linda Chatman Thomsen.
Last week, House lawmakers grilled SEC officials for failing to uncover the $50 billion Bernie Madoff ponzi scheme. Rep. Gary Ackerman, D-N.Y., delivered the most withering criticism of the agency, which he repeatedly called "useless."
Following the hearing, Schapiro took the unusual step of apologizing to the committee. One securities lawyer speculated that it is hard to imagine how Thomsen could remain at the commission after weathering such a rhetorical beating from Congress.
"I can't imagine that Mary wouldn't replace Linda," the source said.