Pressure's on

As Mary Schapiro scrambles to undo the errors of past SEC chairmen, she will be demanding answers and accountability for some monumental blunders.

And so will her boss, President Barack Obama.

The president essentially put Ms. Schapiro, the new chair of the Securities and Exchange Commission, and the rest of the government on notice Feb. 24 during his address to a joint session of Congress.

Mr. Obama has pledged to remake the financial regulatory system, and that means creating new rules for financial institutions and a promise to bring stricter oversight without hindering free markets.

If Ms. Schapiro does not live up to the intensely high expectations, she will not be able to blame it on a lack of funds.

Under the president’s plan, the SEC’s budget for fiscal 2010 would increase by more than 13% from its 2008 budget of $906 million.

Such a boost to the budget is something different for the SEC.

For fiscal 2009, which ends Sept. 30, the Bush administration asked Congress to increase the SEC’s budget by less than 1%, to about $914 million.

The 2009 budget has not been finalized by Congress.

If Ms. Schapiro does not whip the SEC into shape, her job and her legacy as a career regulator could be at stake.

The pressure is on her. Even a cursory glance at recent SEC action in the area of enforcement shows that the agency has been slow or inefficient in a number of matters, both large and small.

For Ms. Schapiro, foremost is an explanation as to why the SEC neglected to act on a credible tip that Bernard Madoff's investment business was a sham.

Additionally, as she prepares to overhaul the agency and make it more efficient in acting on tips and prosecuting cases, she would be wise to take heed of smaller issues that often fail to grab headlines but can have a profound impact on investors as well as investment advisers.

Take, for example, the $2.3 million the SEC collected from a broker and his firm in 2004 to resolve a mutual fund B-share case in which the broker, J. Michael Scarborough, allegedly failed to give 400 clients certain discounts.

Early last month, the SEC said it had devised a “proposed distribution plan” to return the money, with interest to investors. Industry lawyers scoffed that it would take almost five years to return, on average, $5,750 to every client.

One longtime industry attorney said it would take him a week to figure out how to give clients their money back; another said six months.

Only the SEC said it would take four-and-a-half years to give people their money back.

Mr. Scarborough, who was fined $50,000 in the matter, said he paid $2 million in 2004 to settle up, with the AIG Advisor Group contributing the rest.

John Nester, an SEC spokesman, did not return calls for comment on the matter.

Another example of the SEC’s dragging its feet took place last month when the agency charged an ex-broker, who has been on the lam for almost three years, with fraud. SEC officials said they “believed (the ex-broker) to be living in Argentina.” For the record, the Colorado attorney general’s office indicted the former broker, William Walters, in 2007 on nine felony counts of securities fraud.

He allegedly stole about $5.4 million from clients from 2000 to 2006 while running a Ponzi scheme.

“Walters was recently arrested in Argentina, and Colorado state criminal authorities are attempting to extradite him to Colorado,” the SEC said in its lawsuit. “He has been released by Argentine authorities on bail pending the outcome of the extradition proceedings.”

Mr. Walters' track record proves there’s a good chance he will jump bail.

Taking years to settle relatively simple matters, or simply being late to the game, is par for the course at the SEC, said one industry attorney and noted gadfly, Bill Singer, a securities lawyer with Stark & Stark of Lawrenceville, N.J.

“The system wants it that way,” said Mr. Singer, who was an attorney for the former NASD of Washington.

When doing business with the SEC, attorneys with broker-dealers and investment advisers said that the agency “always (said), ‘You have to be patient because our staff is overwhelmed.’”

Everyone’s patience has worn thin.

Ms. Schapiro must assert control and provide direction; a business-as-usual approach in these unusual times simply won’t work.

Bruce Kelly is a reporter at InvestmentNews, a sister publication of Pensions & Investments