From self regulation to government regulation: Mary Shapiro move to the SEC as a metaphor?

Mary Shapiro, unquestionably a highly qualified choice, was confirmed by the US Senate and is expected to be sworn in the next days as the new chairman of the Securities Exchange Commission (SEC).  She would literally be moving from a chief self-regulator to a chief government regulator.  Her previous position was as CEO of the Financial Industry Regulatory Authority, FINRA, the largest independent and non-governmental regulator for securities firms in the US.  In her Senate hearings, Shapiro indicated that she would give priority to the regulatory problem in the country and that she will reinvigorate the SEC enforcement divisions.  But according to a Wall Street Journal article, Shapiro showed a light regulatory touch at FINRA.

Ideological leaders mold the job description to their world view.  Pragmatic ones mold themselves to the job description.  In theory, therefore, it may be an open question whether self-regulation ideology migrates from FINRA to SEC, or efficient leadership to enforce government regulations takes hold at SEC. 

But this is largely academic, since an injection of ideological self-regulation is not only politically impossible in the aftermath of the financial debacle and with the Obama administration, but also because in practice the SEC largely abdicated many of their oversight and regulatory functions over the past years.  The regulatory and oversight laxity over the largest investment banks, as well as the failure to unmask Madoff’s Ponzi schemes in spite of the abundance of incriminating information they had, do illustrate.

Some of the evidence appears to point to conflict of interests (Madoff sitting on their advisory board and also providing advise to the SEC on how to regulate…) and undue influence by the largest investment banks.  Not only whistleblowers who may have denounced Madoff were put in a weaker position, but more generally the agency’s ability to perform its role may have been compromised.  For instance, already in 2006 the SEC knew that Madoff had misled them about how he managed customer’s money.  

Further, the SEC also has some serious structural and operational challenges. And there will have to be better safeguard against ‘capture’ (whether soft or hard, legal or illegal) by the regulated institutions and individuals.  Mary Shapiro has her work cut out.  She has vowed to be a tough enforcer.   An era of de jure and de facto self-regulation may be over.  All the best to her on a major challenge.