During her tenure as chairman of the U.S. Securities and Exchange Commission, Mary Schapiro restored the agency’s tarnished image and strengthened protections for shareholders. But she will leave behind much unfinished business for her successor, along with a deeply divided commission that remains under fire.
Schapiro took over as chairman in 2009 amid criticism that the SEC had given Wall Street free reign to create the complex, risky and wildly profitable financial instruments that led to the financial collapse, and looked the other way when presented with evidence of Bernard Madoff’s brazen Ponzi scheme.
Under her leadership, the commission revitalized and beefed up the demoralized staff, brought a record number of enforcement actions, and returned more than $6 billion to investors harmed by corporate malfeasance. Former SEC Commissioner Harvey Pitt credits Schapiro with “virtually single-handedly preventing the commission’s demise.”
Schapiro’s SEC brought 735 enforcement actions in the 2011 fiscal year and 734 in 2012 – each total marking a new high for the agency. The commission also began the arduous task of implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act. With nearly 100 rules to review and put in place, the process has monopolized staff resources even as the agency has fallen behind schedule.
As part of that regulatory process, the commission also established a new whistleblower protection program and tightened restrictions for advisers of hedge funds.
But Schapiro, whose resignation is effective Dec. 14, could not overcome admittedly numerous obstacles in other key areas.
She arguably failed to adequately weigh the costs and benefits of an SEC plan to give large shareowners at public companies some parity when opposing entrenched management candidates in proxy fights, leading a federal appeals court to strike it down. She couldn’t convince a majority of her fellow commissioners to support proposed reforms to the money market mutual fund industry that she herself had deemed a top priority. She put off reigning in high-frequency traders who siphon profits from institutional and retail investors without offering clear value in return.
“Chairman Schapiro deserves high marks if you consider the difficulties she faced – a divided commission, an unrelentingly hostile Republican House majority during the last half of her term, and a financial services industry that challenged every forceful move she attempted,” said Kevin Shelley, special counsel to Berman DeValerio.
“The next SEC chair should be even more aggressive in pursuing the needed reforms, given the unfinished business at hand,” Shelley said.
For investors alarmed by their shrinking legal rights, one major item on the SEC’s agenda would be to try again to address repercussions of the Supreme Court’s2010 decision in Morrison v. National Australia Bank, which sharply restricted the ability of institutional investors to hold multinational corporations responsible for malfeasance.
The decision, penned by Justice Antonin Scalia, held that investors could only seek damages for fraud if they had purchased their shares on a U.S. exchange. Previously, courts had generally allowed investors to sue foreign issuers if plaintiffs could show that the fraud had either been largely perpetrated on U.S. soil or had a major impact on U.S. citizens.
Dodd-Frank empowered the SEC to write clear rules restoring the right of U.S. investors to sue, even if they had purchased their shares overseas. But after months of consideration, the commission issued a report that exhaustively recapped the arguments on both sides and its previous position, without urging Congress to pass any specific legislation.
From a legal standpoint, the failure to urge Congress to restore the rights stripped by Morrison was perhaps the biggest failing of Schapiro’s term, said Joseph J. Tabacco, Jr., managing partner of Berman DeValerio’s San Francisco office.
“The SEC essentially punted on the decision about Morrison,” Tabacco said. “I would flag that as a major disappointment. Overall, I’d give her a B. She gets marked down a grade because of Morrison. That was a major blow for institutional investors.”
To be fair to Schapiro, she faced an impossible task in particularly fraught times. Nowhere was this political high-wire act more evident than in the recent criticism of her decision to slow implementation of a harmful rule associated with the Jumpstart Our Business Startups Act.
The deceptively named JOBS Act received bipartisan Congressional approval earlier this year on the strength of its job-growth message, despite strenuous objections from investor advocates. In the words of Democratic SEC Commissioner Luis Aguilar, the JOBS Act could “seriously hurt investors by reducing transparency and investor protection and, in turn, make securities law enforcement more difficult.”
One section of the JOBS Act exempts “emerging growth” companies – defined as having less than $1 billion in revenues – from certain disclosures required by federal securities laws for five years after they go public. Another rule, which the SEC was tasked with implementing, would allow providers of hedge funds and other alternative investments to advertise to the general public. They are currently required to restrict their marketing to the wealthy individuals and institutions “qualified” to invest in such risky, esoteric products.
After criticizing parts of the JOBS Act in public statements, Schapiro eventually relented, initially going along with the staff’s recommendation to fast-track approval of an “interim final rule” for hedge fund advertising, rather than giving it a full hearing. But after receiving a strongly worded email from Barbara Roper of the Consumer Federation of America, Schapiro rethought her position.
“I don’t want to be tagged with an anti-investor legacy,” Schapiro wrote in an email to her to SEC staffer Meredith Cross explaining why she had decided to overrule the staff and follow regular procedures allowing for public comment on the rule.
The decision to slow implementation of the rule angered financial industry professionals, Republican legislators and Republican SEC Commissioner Daniel Gallagher.
The SEC’s official response was telling. “Chairman Schapiro strongly believes that protecting the legacy should be the desired legacy of all SEC Chairmen. It is part of our mission and should inform our decisions at all times. She also believes that the agency should not consider investors – or the groups that represent them – to be special interests.”
The only SEC commissioner Schapiro notified of her decision was her close ally Elisse Walter, one of two Democrats on the five-member commission and President Obama’s choice to succeed Schapiro.
Some shareholder advocates are hoping the President appoints an assertive chair to a full term as chairman before Walter’s term expires at the end of 2013. Until Obama’s next choice for the SEC is confirmed by the Senate, there are concerns that the current makeup of the commission, with two Republicans and two Democrats, will result in deadlock.
*In August 2017, our firm name changed to Berman Tabacco. Case references and content published before that date may refer to the firm under our prior name, Berman DeValerio.