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Project on Government Oversight

Senate Banking Committee Fails To Hold SEC Nominee Accountable For Failed Self-Regulatory Apparatus

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January 15, 2009

Today's Senate Banking Committee's hearing of Mary Schapiro, president-elect Obama's pick for Chairman of the Securities and Exchange Commission (SEC), failed to yield any substantive information about the nominee.

Having long served as head of the securities industry's principal self-regulatory organization (SRO), and having in that capacity often extolled the virtues of self-regulation, Ms. Schapiro is deeply invested in the failed regulatory apparatus that is at least partly to blame for the economic crisis we now face. In our view, the incoming SEC Chairman must be prepared to question the orthodoxies on which the existing structure is based and to face down powerful and deeply entrenched industry interests.

"We need a strong regulator at the head of the organization charged with protecting our markets. Schapiro's hearing did not reflect the gravity of the position or the financial uncertainties of the time," said Danielle Brian, Executive Director, Project On Government Oversight.

As GAO points out in a recent report, our current financial regulatory system is in need of an overhaul. The SEC Chair will, presumably, be one of the principal players in such any restructuring. We question whether Ms. Schapiro is the right person to confront the extraordinary challenges that await the incoming Chairman.

While the Committee has requested that the Financial Industry Regulatory Authority (FINRA), the organization Ms. Schapiro currently leads, turn over its documents on Madoff's firm, we believe Schapiro's faith in self-regulation warrants more scrutiny. Among the questions the Committee should have asked Ms. Schapiro to address are the following:

  • What do you consider to be the appropriate allocation of regulatory responsibility between the SEC and securities industry SROs? As between the SEC and the SROs, which do you consider to have been more responsible for having failed to perceive and address the systemic problems that gave rise to the current economic crisis? Why?
  • In testimony before Congress in May 2007, you expressed faith in the ability of "industry participants . . . to identify potential problems, thus enabling regulators to stay ahead of the curve." During your tenure as head of NASD/FINRA, what substantive problems have industry participants identified that have "enabl[ed] regulators to stay ahead of the curve"? Why did industry participants not sound an alarm with regulators regarding the grave risks associated with their involvement in mortgage-backed securities?
  • In 2002, NASD created what it called the Ahead of the Curve Initiative, which you have described as "the first organized effort by any regulator to set up and fund a cross-organizational program designed specifically to target industry-wide regulatory problems early and address them quickly." What "industry-wide regulatory problems" has the program identified and addressed? Why, even with the Ahead of the Curve Initiative, did FINRA not become aware of the problems that led to the crisis we face today? What lessons, if any, do you draw from the failure of knowledgeable industry participants to call the problems to the attention of regulators before they gave rise to a massive financial crisis?

While Ms. Schapiro may be able to point to a number of problems her organization corrected, it seems that they missed the big ones.  

Founded in 1981, the Project On Government Oversight (POGO) is a nonpartisan independent watchdog that champions good government reforms. POGO’s investigations into corruption, misconduct, and conflicts of interest achieve a more effective, accountable, open, and ethical federal government.