US SEC looks to reassure investors

NEW YORK - Securities and Exchange Commission officials looked to reassure investors on Friday that they would reinvigorate the agency’s policing of Wall Street, improve the quality of credit ratings and said they expect to bring more cases against mortgage fraud.



By (Reuters)

Published: Sat 7 Feb 2009, 8:41 AM

Last updated: Thu 2 Apr 2015, 3:54 AM

“I like to tell the staff we are going to act like our hair is on fire,” newly installed SEC Chairman Mary Schapiro told reporters in Washington, two days after a congressional hearing slammed the agency for not uncovering Bernard Madoff’s alleged $50 billion fraud.

Schapiro announced she had already ended a Bush administration program that made it harder for SEC lawyers to negotiate settlements with companies.

The program requiring SEC investigators to get commission approval for settlements “discouraged staff from arguing for a penalty,” Schapiro told a conference.

She vowed to minimize red tape impeding investigations.

The SEC was blasted at a House Financial Services subcommittee hearing on Wednesday for not following up on repeated tips over nine years from a former investment manager who thought Madoff’s investment operation was suspicious.

New York Democratic Rep. Gary Ackerman told five SEC officials at the hearing, “You have totally and thoroughly failed in your mission.”

Prosecutors have said Madoff cost investors some $50 billion through a Ponzi scheme in which money from newer investors was used to pay early investors.

Speaking at the Practising Law Institute’s annual conference, SEC Speaks, in Washington on Friday, Schapiro said she was looking for ways to improve how the SEC handles tips and whistleblower complaints.

Mission failure

The New York Post reported on Friday that Schapiro was looking to replace Linda Thomsen, head of the SEC’s enforcement unit.

The SEC declined to comment on the report, which cited unnamed sources saying Schapiro was checking out professionals in various offices of the U.S. attorney, who litigate cases on behalf of the federal government under the attorney general’s direction.

Thomsen’s unit is responsible for investigating allegations of securities fraud.

Schapiro said the SEC had to play a critical role in reviving financial markets and bolstering investor confidence.

“We have to have a laser-like focus right now on investor protection,” she said. “I would like to have a mechanism to have regular contact with the investor community so we can hear the issues they are concerned about.”

Donald Hoerl, director of the SEC’s Denver office, told the conference the SEC had filed about 70 Ponzi cases in the last two years and four since Madoff was charged in December.

“That’s not a dramatic upswing in terms of the number of cases. What is different is the magnitude of the Ponzi schemes,” Hoerl said.

In late January, the SEC charged then-missing fund manager Arthur Nadel with defrauding investors at six Florida-based hedge funds. The agency said Nadel had given investors false information about the funds’ returns and overstated the value of the investments by $300 million.

“The magnitude of these schemes serves as a reminder to us we need to continue our focus in this area,” Hoerl said.

Subprime’s badlands targeted

Rosalind Tyson, regional director of the SEC’s Los Angeles office, told the conference the SEC expected to be filing additional actions related to subprime mortgages.

Subprime mortgages given to high-risk borrowers unable to meet standard mortgage requirements helped collapse the U.S. housing market and triggered billions of dollars in losses at financial institutions invested in the U.S. mortgage market.

Tyson said the SEC was looking into mortgage originators, mortgage securitizers, credit rating agencies, and sellers of mortgage-based securities.

One difficulty in subprime investigations was proving fraudulent intent, she said. “Poor business judgment does not equate to fraud.”

The SEC is looking at whether lenders disclosed risk profiles of underlying loans, valued their portfolios appropriately and made adequate risk disclosures to investors.

The agency under Schapiro is also set to focus on further reform for credit rating agencies, a business SEC Commissioner Kathleen Casey termed an “oligopoly”.

“It is crucial for the SEC to foster an environment ... which is unapologetically pro-competitive,” Casey told the conference.

Schapiro said one of her priorities would be to improve the quality of credit ratings by addressing conflicts of interest the agencies face as a result of their compensation models.

Credit rating is dominated by Moody’s Corp MCO.N, Standard & Poor’s MHP.N and Fimalac SA’s LBCP.PA Fitch Ratings, which have been accused of not doing enough due diligence before assigning top ratings to securities that later deteriorated in value.

Credit rating agencies rate debt and preferred stock issues for companies’ ability to pay principal, interest or dividends, and investment decisions are made based on those ratings.

Ten rating agencies are registered with the SEC, but Moody’s, S&P and Fitch still dominate the industry.

Gaps, overlaps

Elisse Walter, one of the five SEC commissioners who make decisions on federal securities rules, said Congress must address the gaps and overlap in oversight of securities, futures and derivatives markets.

Futures and derivatives are regulated by the U.S. Commodity Futures Trading Commission (CFTC).

Unregulated derivatives have been blamed for contributing to the financial crisis because some were used to speculate on borrowers’ credit quality.

Walter did not endorse a merger between the SEC and CFTC, but she said there was significant regulatory overlap between the two agencies.

Walter is a former general counsel of the CFTC and Schapiro is a former chairman of the CFTC. SEC Commissioner Casey favors merging the two agencies.


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