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SEC’s Schapiro Faces Republicans Amid Probes of Agency Lapses

SEC’s Schapiro Faces Republicans Amid Probes of Agency Lapse
Securities and Exchange Commission Chairman Mary Schapiro, lower right, sits in front of Republican lawmakers at a House Financial Services hearing Sept. 15. Photo: Rich Clement/Bloomberg

Sept. 15 (Bloomberg) -- U.S. Securities and Exchange Commission Chairman Mary Schapiro has defended her agency for more than two years from attacks by lawmakers. Her job is getting harder as the 2012 election campaign heats up.

Schapiro is scheduled to testify twice before Congress in the next two weeks as House Republicans sharpen their assault on President Barack Obama’s economic plan, arguing that excessive regulation is stifling job growth. A hearing today will consider plans to shutter some SEC offices and set new standards for evaluating the costs and benefits of the agency’s rules.

The scrutiny is being fueled by a wave of investigative reports from SEC Inspector General H. David Kotz, who in May detailed the agency’s bungling of a $557 million lease. Kotz is now probing a possible conflict of interest involving the agency’s former chief lawyer and his family’s investment with Bernard Madoff, as well as unrelated allegations that SEC officials improperly destroyed some documents.

“It’s not a question of who’s holding a hearing, but how many,” said Sam Geduldig, of Clark Lytle & Geduldig, a Republican lobbying firm.

The 2010 Dodd-Frank Act required the SEC to write dozens of new rules for Wall Street and authorized a doubling of its budget over five years. Congressional appropriators rejected the increases, and Republicans have sought to keep the SEC at current spending levels next year while criticizing the reach of the new regulations.

The Democrat-controlled Senate and the Obama administration support budget increases, limiting the Republicans’ ability to trim spending. The SEC’s budget is covered by industry fees, although Congress still must approve each year’s spending.

Structural ‘Flaws’

Asked to comment on the upcoming hearings and discussions, John Nester, an SEC spokesman, said in a statement that “we look forward to working with Congress” on the SEC’s mission.

Representative Spencer Bachus, the Alabama Republican who leads the House Financial Services Committee which will hold today’s hearing, said last month that the SEC “is structurally flawed and suffers from operational inefficiencies and organizational incoherence.”

Of Kotz’s investigations, Republican lawmakers have focused on the one involving former SEC general counsel David Becker. The SEC has acknowledged that Becker worked on a policy related to the Madoff fraud after he inherited profits from his parents’ investment with the convicted money manager. Becker and his brothers are being sued by the court-appointed trustee in the Madoff bankruptcy case to recover $1.5 million in what he termed fictitious profits.

Grassley Demands

Becker, who resigned from the SEC in February, advocated that Madoff victims be compensated for losses from an SEC-overseen insurance fund using a formula that adjusted for inflation. The argument, which ultimately was not adopted, could have made it less likely that the trustee would seek to reclaim profits from Becker.

While Becker has said he had raised the issue with the SEC’s ethics officer and was told his inheritance wasn’t a conflict, Iowa Republican Senator Charles Grassley called the issue “troubling” and demanded that the SEC bolster its policies about conflicts of interest.

Schapiro told a House panel earlier this year that she wished Becker had recused himself. In a letter to lawmakers, Becker said he is “confident that any fair review of my actions” will show that the work was in the best interests of investors and the SEC.

Joint Hearing

Representative Darrell Issa, a California Republican who is chairman of the Oversight and Government Reform Committee, and Representative Randy Neugebauer, a Texas Republican who heads a Financial Services subcommittee on investigations, have called a joint hearing for Sept. 23 to coincide with the expected release of Kotz’s report.

Kotz has asked current and former SEC officials if they were “concerned” that Becker worked on Madoff-related policy at the commission without disclosing his potential conflict to anyone but Schapiro and the ethics attorney who worked for him, according to two people briefed on the investigation. They spoke on condition of anonymity because the matter isn’t public.

The lawmakers, according to three people who were interviewed by congressional investigators, are particularly interested in the SEC’s internal deliberations over designating an official to testify at a December 2009 Financial Services hearing on compensating Madoff victims. Becker, the people said, was slated to testify but decided he couldn’t do it unless he disclosed his parent’s Madoff investment. In the end, the agency sent another lawyer.

‘Witch Trial’

Lawmakers want to know if there was a deliberate attempt to keep the potential conflict hidden from Congress and the other SEC commissioners, the people said.

Former SEC officials said the inspector general reports are being used for political rather than policy purposes.

“This appears to be a public witch trial by politicians and the SEC’s inspector general rather than a genuine effort to improve the agency and its protection of investors,” said Lynn Turner, a former SEC chief accountant.

Last month, Bachus, the Financial Services chairman, proposed a bill to restructure the SEC, shuttering some offices and restricting spending, based on recommendations from Kotz, the Government Accountability Office and Boston Consulting Group Inc.

Kotz said in a statement yesterday that he wasn’t motivated by politics and that he “never advocated cutting the SEC’s budget and I wouldn’t be happy for my reports to be used as a reason to do this.”

‘Very Concerned’

In prepared testimony for today’s hearing, Schapiro said she “would be very concerned about the overarching loss of the agency’s flexibility in the future to change with our dynamic capital markets if its structure is rigidly established by statute.” Schapiro also pointed to a Boston Consulting Group analysis that determined the SEC is hundreds of employees short of what it needs to manage its duties.

A separate bill has been proposed that would detail specific standards for the SEC’s cost-benefit analysis of rules and orders.

In prepared remarks, Schapiro said the bill “would be more extensive and more onerous than the requirements placed on other agencies.”

Lobbyists for business groups have repeatedly criticized the agency for failing to measure the costs and difficulty of complying with regulations, and industry has challenged SEC rules in court on those grounds. Earlier this year, the SEC dropped a rule making it easier for shareholders to nominate board candidates after a U.S. court found the agency didn’t adequately examine the burden on the firms.

Document Destruction

The agency has also come under fire recently over allegations that SEC enforcement attorneys illegally destroyed documents related to preliminary investigations for more than a decade. In a letter yesterday, enforcement director Robert Khuzami said the agency kept electronic records of all the inquiries and that discarding materials such as news articles and public filings had not harmed any current or future investigations.

Harvey Goldschmid, a former Democratic SEC commissioner who is a professor at Columbia University Law School, said Republicans are unfairly using the probes as an excuse to cut the SEC’s budget.

“Mary Schapiro and the SEC deserve much better than that,” Goldschmid said.

To contact the reporters on this story: Joshua Gallu in Washington at; Robert Schmidt in Washington at

To contact the editor responsible for this story: Lawrence Roberts at

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