[ by Howard Haykin ]

In NYT Dealbook, Richard Farley, a partner with Paul Hastings, urges President Obama to take 'the high road' in selecting a candidate to replace Mary Schapiro as Chairman of the SEC.  He points to history - during Franklin Roosevelt's first term in office - when modern financial regulation was created.  

That would entail looking back to the early days of the SEC in the 1930s when, according to Mr. Farley, "a wholesale, sweeping overhaul can be accomplished quickly if the right leadership is installed."  In the 1930s, the right choice was Joseph P. Kennedy, a stock market operator, and according to some a 'manipulator', who had made a fortune on Wall Street during the great bull market of the 1920s, got out just in time before the 1929 crash, and made a second fortune playing the market all the way down.

Legacy of Mary Schapiro as SEC Chair.   While much has been said about the unfinished business that Mary Schapiro will leave behind as she steps down as SEC Chairman after nearly four years, Ms. Schapiro has made considerable progress at the Commission, much to her credit.   She shored up the Agency's battered reputation - following failures connected with the Madoff fraud, and the SEC's perceived impotence during the Lehman collapse and subsequent financial crisis. Yet some big changes are still needed to plug the gaps and deficiencies revealed from the 2008 financial crisis, including:

• The Dodd-Frank Act, and its keystone market reform provisions - the Volcker Rule. 
• The JOBS Act, and its newly approved crowd funding provisions.
• High-speed trading, which many believe disadvantages the everyday investor.

• And then there's Money Market Fund Reforms.

There are many reasons for the delays.  Complexity of separating the proprietary trading and hedge fund operations of the banks.  Heavy resistance and lobbying by Wall Street firms.  Political bickering between Republicans and Democrats on the Hill.  But, as Mr. Farley points out:

This is hardly the first time the S.E.C. has faced opposition from Wall Street over changes. In fact, from the very beginning of its creation, businesses were hostile to what they saw as overregulation.

Returning to History Circa Roosevelt.   Roosevelt accomplished a lot within a very short period of time - some of which was monumental in scope.  Within 2 years of his inauguration, he had passed a financial reform package that included:

• the Banking Act of 1933, commonly known as Glass-Steagall, separating all of investment banking from commercial banking and established the FDIC and nationwide deposit insurance; 
• the Securities Act of 1933, requiring registration of all public offerings of securities;
• the Securities Exchange Act of 1934, which regulated the securities exchanges and securities traded thereon and established the SEC to oversee these securities laws.

Within one year, the SEC covered a lot of ground, as well:

• it organized itself;
• established branch offices;
• created rules for regulating securities exchanges;
• required the registration of securities that would trade on those exchanges;
• adopted rules governing impermissible activities in trading those securities;
• determined the reports that companies and their officers and directors would need to file with the commission.

Nearly 80 years later, many of the original rules and forms are basically unchanged - though some might point to this as an unattended problem.  Even the filing forms are not fundamentally different. This financial regulatory genesis dwarfs the task of completing the Volcker Rule.

Credit for creating the SEC in a year largely goes to ...   Chairman P. Kennedy, whom Roosevelt chose over a safe political choice, Ferdinand Pecora, the firebrand lead counsel for the Senate Banking Committee who grilled the titans of Wall Street during hearings into the stock market crash and its aftermath and uncovered shocking market abuses. 

[C-I Note:  Of course in those days, it also took about one year to build that architectural marvel, The Empire State Building.  The quality and pace of construction will never be matched in the current era.]

According to Mr. Farley, Kennedy turned out to be Roosevelt's best appointment to any of the New Deal agencies. As Chairman, Kennedy created an agency that, rare among the New Deal agencies, did precisely what it was created to do and survives to this day.  "His accomplishment was unmistakable. He had taken a law that seemed almost unworkable, and had administered it so as to reassure business, simplify corporate borrowing, and boost investor confidence," wrote the historian Richard Whalen.

Back to President Obama Considerations and Options.     Farley suggests that, when President Obama selects the successor to Mary Schapiro,  he would serve himself and the country well by considering a successful market professional from Wall Street, preferably someone who, like Joseph Kennedy, is not concerned with offending interested constituencies (or with the "career consequences" thereof).  That indvidual would principally be concerned with leaving a legacy of public accomplishment that will be a credit to his or her family name.

Such an individual, according to Mr. Farley, gives us the best chance of the prompt, decisive action that will be necessary to complete the SEC's unfinished business.

[C-I Note:  This writer largely agrees with Mr. Farley and, in my opinion, the President should select Sallie Krawchek.  We at Compliance Insights see "politics" as perhaps the greatest deterrence to regulatory progress.  Ms. Krawchek appears to have the political savvy to deal with the powers that be and get things done.  It also doesn't hurt that she is viewed by many as genuinely concerned for the everyday investor.  -  We'll discuss this further in a separate post.]

For further details, go to:   [Dealbook, 12/4/12].