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At Schapiro Confirmation Hearing, Senator Says It Makes No Sense For Wall Street's Watchdog To Do Its Work From Afar

Schumer Also Urges Creation of Risk Assessment Office—These Monitors Would Also Be Headquartered In New York

WASHINGTON, DC—In remarks made Thursday at the confirmation hearing for President-elect Barack Obama’s nominee to head the Securities and Exchange Commission, U.S. Senator Charles E. Schumer (D-NY) called for increased resources for the agency’s preventative efforts, and said those operations should be relocated to New York City so that regulators can more closely monitor Wall Street’s activities.


Schumer, who introduced nominee Mary Schapiro before the Senate Banking Committee, said headquartering the Office of Compliance Inspections and Examinations in New York would aid the SEC’s enforcement efforts. Schumer also called for the creation of a new office, first suggested by former SEC Chairman Bill Donaldson, to perform risk assessment. The senator said this office should be housed in New York City as well.


“These preventative efforts should be based out of New York City.  It makes no sense to have inspectors, examiners, and risk assessors headquartered in Washington, D.C. when all of the activity they need to be monitoring occurs on Wall Street.  At the same time, moving these functions to New York will improve the SEC’s ability to hire top professionals with the skills and experience to unearth fraud,” Schumer said.


A copy of Schumer’s full statement at Schapiro’s confirmation hearing appears below.


Statement of Charles E. Schumer

Nomination Hearing for Mary Schapiro

January 15, 2009


I’d like to welcome you this hearing Ms. Schapiro, and congratulate you on your nomination to serve this country as the Chairman of the SEC.  When you and I met last week, I must say that I was quite impressed by not only your broad and deep knowledge of the securities industry, which I expected, but also by your clear recognition of the problems that the financial markets, and the entire country, are presently facing. 


You come here with a long background in securities regulation, with experience leading many of the major institutions that make up our capital markets regulatory system.  You currently head up FINRA, the non-governmental regulator for the NASD and NYSE that has historically served a vital role in the regulation of securities firms.  Prior to that, you were Chairman of the CFTC.  And before that, you served with distinction as an SEC Commissioner.


The trick is for you to turn that experience into a regulatory toolbox that you can use to rein in the perilous excesses of the industry while still preserving the entrepreneurial vigor that is the hallmark of a free market.


In other words, you know the world of securities regulation as well as anyone out there.  Unfortunately, you will need every drop of this knowledge to succeed in your new position, because we now face a financial crisis as enormous as we have ever seen in our lifetimes.  And the sad truth is that this crisis was caused in large part by the failures of your predecessors at the SEC.


Under the radical laissez faire ideology of Bush-appointed regulators, we saw explosive growth in precisely those areas which were unregulated or under-regulated by the SEC.  Investment banks were allowed to accumulate enormous amounts of risk.  Credit derivatives mushroomed to over $60 trillion in value.  The hedge fund industry saw tremendous growth without any transparency.  And of course, the credit rating industry grew as well, as the firms issued thousands of undeserved AAA ratings that made everyone all too comfortable that these unregulated investments were safe and sound. 


Despite all these problems, I believe the SEC has retained a strong fundamental ability to be a sound regulator with the right leadership.  Does it need some major reforms?  Absolutely.  And I think that in your testimony, Ms. Schapiro, you demonstrate that your priorities are in the right place.


First, the SEC needs a much stronger emphasis on finding and preventing fraud by bolstering its inspection and examination process. The only way that the SEC is going to find crooks is if it’s actively looking for them. The SEC should also follow through on former Chairman Bill Donaldson’s initiative to have an Office of Risk Assessment.  We need to update the SEC’s tools to catch fraud as it is happening by ensuring that it has the resources and expertise it needs. This office would help the SEC triage its cases and focus on those it determines pose the greatest risk.


These preventative efforts should be based out of New York City.  It makes no sense to have inspectors, examiners, and risk assessors headquartered in Washington, DC when all of the activity they need to be monitoring occurs on Wall Street.  At the same time, moving these functions to New York will improve the SEC’s ability to hire top professionals with the skills and experience to unearth fraud.


Second, we must have regulatory reform to ensure that there are no more unregulated pockets that might pose a systemic risk to our financial system.  In times of crisis, our financial regulators should not be playing whack-a-mole, facing unexpected threats, from unregulated areas of the market, that pop up every time they’ve dealt with one crisis. Instead, they must function more like doctors – they must be strong, always watchful, always independent regulators that can snuff out problems before they grow dangerous to the system as a whole. 


We must start by bringing unregulated derivatives into the fold.  There are currently efforts underway to create derivative clearinghouses, which would centralize the systemic risk of some types of derivative trading.  The Fed, SEC, and CFTC are collaborating on the regulatory oversight of these clearinghouses—something I applaud—but we must continue to be vigilant in ensuring strong regulation of these entities.  We should make sure that these clearinghouses have a presence in the United States, where they will be subject to the full oversight of our agencies. Right now the European Commission is debating a policy that would mandate exclusively European clearing of certain derivatives. This kind of protectionist policy has no place in the modern world, and I am strongly urging our regulators at all levels to vigorously resist this power grab by the EC.


We also need to improve our regulatory scheme for rating agencies.  The main problem with these actors was that they were inherently conflicted.  You can’t be expected to provide unbiased ratings if the people paying your salaries are the ones you are rating.


We would never consider allowing our students to pay for their grades. Why have we let our banks do essentially the same thing? We need to find a way to promote, or perhaps even require, alternative funding schemes, such as an investor-funded model, which I have been a leading advocate of.


In short, Ms. Schapiro, you face a daunting task ahead of you.  Major changes are necessary, and you will be the one leading the charge.  I believe you have the right experience and the right pragmatic approach to successfully reform the SEC, and restore the reputation of our capital markets as the best and safest in the world.



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