For SEC Chairman Mary Schapiro, last week's dust-up involving Finra is the latest in a string of embarrassments she has endured since taking over the embattled agency in 2009.
Before last week, Ms. Schapiro had faced criticism for the way she handled former Securities and Exchange Commission general counsel David Becker's conflict of interest in the Bernard Madoff case, and for how commission employees were able to lease $557 million in Washington office space that the agency didn't need. In fact, the SEC's own inspector general referred 28 cases to the Justice Department from October 2007 through March.
Ms. Schapiro also faced congressional fire last month for reports that the SEC destroyed documents related to Finra referrals of suspicious trading by hedge fund SAC Capital Advisors LLC.
Sen. Charles Grassley, R-Iowa, said that it appears that the SEC may have sanctioned “some level of case-related document destruction” after a commission attorney said that the agency regularly destroyed evidence if a preliminary inquiry didn't yield a full-blown investigation.
The negative headlines, which don't personally accuse Ms. Schapiro of wrongdoing, raise concerns that the SEC may be losing credibility, observers said.
“This is a tough situation for Chairman Schapiro because the SEC is cast with overseeing Finra, which this case shows has been altering documents, and recently the SEC itself came under fire for destroying documents,” said Denise Voigt Crawford, a Texas Tech University Law School professor, retired Texas securities commissioner and former president of the North American Securities Administrators Association Inc.
In the latest incident, the SEC alleged that a Financial Industry Regulatory Authority Inc. regional director altered documents that the self-regulator provided to commission inspectors in August 2008, 13 months after Ms. Schapiro became its first chief executive.
The SEC's complaint also said that in two other instances, two different employees of NASD — the predecessor to Finra — doctored documents before turning them over to commission inspectors.
Ms. Schapiro was vice chairman of NASD during that time.
“Schapiro is trapped between a rock and a hard place with respect to everything Finra-related,” said Mercer Bullard, founder of mutual fund shareholder group Fund Democracy and former assistant chief counsel of the SEC. “We now know what we did not know before: that moving from Finra to the SEC chairmanship creates a lot of unavoidable headaches.”
Ms. Schapiro was Finra's chief executive from July 2007 until she was appointed to the SEC by President Barack Obama in 2009.
Certainly, not everyone thinks that she can be held accountable for the actions of every employee while she was head of Finra.
“It's not a positive for her, but is she responsible for someone doing something stupid in the Kansas City office at Finra?” said Todd Cipperman, a securities firm compliance attorney and principal at Cipperman & Co. and Cipperman Compliance Services. “They have knuckleheads at Finra just like they do anywhere.”
And there have been no calls for Ms. Schapiro to step down.
“The Democrats are not going to do that, because she is an appointee of Obama,” Ms. Crawford said. “And the Republicans are unlikely to, because she enjoys such a good reputation in the industry.”
SEC spokesman John Nestor said that Ms. Schapiro didn't participate in the decision to take the enforcement action against Finra and she has no plans to step down.
Finra spokesman Nancy Condon said that Ms. Schapiro left there 18 months before the document issues in August 2008 were brought to light.
As for the incidents that occurred in 2004 and 2005, “It is not reasonable to think that she could have been aware of the specific actions by one lower-level person until they were brought to her attention through normal channels,” Ms. Condon said.
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