Fixing the SEC

Mary Schapiro was tapped to head the SEC.

What do you say to Mary Schapiro?

You might congratulate her as President-elect Barack Obama's choice to lead the Securities and Exchange Commission. Or maybe not.

Schapiro was not selected merely to manage the beleaguered commission that may be experiencing the worst year in its history. She is supposed to fix the SEC, and even that tall order may not be enough. Obama's plans to broadly reorganize financial regulation for our modern era may eventually leave Schapiro's SEC with an important role. Or a desk and a phone.

When you step into a mess like that, it's best to wear boots.

Start with the SEC's recent performance as an enforcer of financial laws and regulations. The market's top cops have compiled a miserable record of failures ranging from epic (the implosion of Wall Street itself) to merely big (Bernie Madoff) this year.

The $50 billion Madoff fiasco is hard for regulators to explain away. The SEC received credible tips about the huge investment scam many years ago and then let Madoff off the hook when it finally took a closer look. Current SEC chairman Christopher Cox even went out of his way this week to criticize how his own commission handled the case.

The SEC's generally passive role in the financial market's meltdown is more damaging. Its regulators were the people responsible for keeping an eye on Bear Stearns Cos. and Lehman Brothers Holdings Inc. We all know how that worked out.

Schapiro's first job as SEC chairwoman will be to reestablish the commission's enforcement mission. She has been through a comparable experience working for the National Association of Securities Dealers, which had done such a poor job policing brokers that people wondered if it could even survive as its industry's own regulator.

"Those were literally the darkest hours of that association, no question," says Neal Sullivan, who leads the securities law practice at Bingham McCutchen LLC. "People were talking about disbanding the NASD. It was her stewardship through that that allowed them to survive."

Schapiro is the chief executive of FINRA, or the Financial Industry Regulatory Authority. It has indeed survived in the role of industry self-regulator. Some people, like Sullivan, think the organization has thrived. Other reviews are more tepid. Among the people FINRA kept an eye on: Bernie Madoff.

Next, Schapiro must maneuver the SEC through the debate about how government should reorganize financial regulation. For this task, she has a solid background. Schapiro's a political independent with good insider skills and experience in the financial industry, serving as an SEC commissioner and heading the Commodity Futures Trading Commission during the Clinton administration.

But it is far from clear how the SEC would fit into a broader regulatory framework, or whether some of its functions should be performed inside a larger government body.

"The greatest threat to the SEC is whether they will have a central role in the future," says Sam Hayes, a professor emeritus at Harvard Business School. "If we were starting from scratch now, we would not reinvent the SEC. We would invent a new, comprehensive regulator that would combine parts of the Federal Reserve, as well as the Comptroller of the Currency and SEC. If I were an SEC staffer, I would be nervous about what role I would have in the future."

Some people think the SEC and CFTC, which oversees $5 trillion in trades, should be merged together. That sounds simple and obvious, but the politics of a combination could get complicated.

The futures industry doesn't like the idea of more regulation and would probably fight a merger. In the Senate, different committees oversee the SEC and CFTC, and neither showed any interest in merging away its influence when the idea came up in the past.

Perhaps the biggest reorganization threats to the SEC come from banking regulators, who also get miserable recent grades for oversight. The surviving big investment banks once regulated by the SEC decided they would be better off as commercial banks instead. Banking regulators appear to have the advantage.

Mary Schapiro will have her hands full. The politics of reorganized financial regulation will play out over her head. But she can reinvigorate a demoralized organization. She can reassert the SEC's role of the market's vigilant overseer and aggressively pursue abuses. Those would be reasons to offer her congratulations.

Steven Syre is a Globe columnist. He can be reached at syre@globe.com.