New SEC head faces challenges too long ignored

“The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly and efficient markets and facilitate capital formation.”

That’s the first sentence in the introduction to the SEC’s website. After four years, Mary Shapiro steps down as chairwoman of the commission Wednesday.

The agency she took over in 2009 had been run by people who were skeptical about the government’s role in regulating our financial markets. They cut back the agency’s role in many areas, including removing the uptick rule and other long-held requirements for selling stock short. They reduced the budget and capability of the agency’s Enforcement Division, which allowed Bernie Madoff to carry on his Ponzi scheme long after the agency had information that would have brought him down under previous administrations. Many believe that lack of SEC oversight contributed to the out-of-control growth of toxic mortgage-backed derivatives. The general belief among those who ran the agency was that the markets should regulate themselves

It took the financial meltdown of 2008-2009 to change their minds, but before he left office Ms. Shapiro’s predecessor, Chris Cox, admitted that “the last six months have made it abundantly clear that voluntary regulation does not work.”

Rebuilding the demoralized agency she inherited would have challenged anyone. Ms. Shapiro has made some progress, bringing in good people and fighting for increased budgets. But the SEC still falls far short when judged by its mission statement.

There have been limited successes. The SEC Enforcement Division has obtained settlements with Wall Street banks that have resulted in hundreds of millions of dollars in fines. But even the federal courts have criticized the settlements because they have been too small.

Beyond the Enforcement Division, the agency has spent most of the past four years getting people on the job and in position to deal with the flood of new or changed regulations required by the Dodd Frank Wall Street Reform bill. Unfortunately, that bill didn’t spell out in detail many new laws. Instead, legislators kicked the can down the road and left it up to the agencies to formulate new regulations. Those regulations still are being written, and Ms. Shapiro’s SEC, in my opinion, has been far too deferential to Wall Street.

Nowhere has this been truer than in trying to deal with the structure of our financial markets and high frequency trading. These are not problems that contributed to the last financial crisis, but if unresolved they will nearly certainly lead to the next one. The structure of our financial markets has changed dramatically in the last 12 years. We have moved from two highly regulated exchanges, The New York Stock Exchange and the NASDAQ, to 15 exchanges and 50 virtually unregulated “dark pools,” where institutional investors can trade out of the public eye.

We have reached the point where more than 50 percent of all stock trades are done by high frequency traders who use mathematical algorithms to run computer programs that execute thousands of trades in less than a second. Concentration on high frequency trading has led to a decline in initial public offerings and made capital formation difficult.

As a U.S. senator in 2009 and 2010, I called on Ms. Shapiro to address the dramatic changes in our financial market structure and the explosive growth in High Frequency Trading. I suggested a consolidated audit trail of all trades, which would allow the SEC for the first time since the onset of digital trading to monitor what was happening on each and every trade. She endorsed the concept, but it took almost three years before the agency announced an audit trail that had been watered down to appease the industry.

My disagreements with her notwithstanding, Mary Shapiro leaves the agency better than she found it. But she also leaves it still failing to fully achieve its goal of protecting investors and ensuring fair and efficient markets.

Originally published 8 December 2012 on