In the latest edition of IFLR's Q&A's series, John Crabb talks to former SEC chair Mary Schapiro about her time with the agency, its future and her experience of the private sector
You were a champion of responsible regulation for many years under your leadership of the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Financial Industry Regulatory Authority (FINRA) and others. What do you think of the direction that the US regulatory agenda is taking under the Trump administration?
I would separate the financial regulatory agenda from a number of the others. With respect to environmental policy, for example, I am deeply troubled by the agenda and the direction that it is taking. But, when you look at the financial markets, specifically capital markets regulation - those areas that have been under the jurisdiction of the SEC and the CFTC - there has not been a striking departure from the historical agenda and approach of the agency.
The SEC is responsible for protecting investors, ensuring market integrity, and promoting capital formation. Chairmen and commissioners of different political stripes take slightly different approaches, but for the most part don’t deviate enormously from prior administrations. So, I think if you look at the SEC in particular and what the agenda has been under chairman Jay Clayton, yes it is more free market than it was under Mary Jo White or myself, but it is not dramatically so and every chairman really does hew to the mission of the agency in terms of understanding that our capital markets are enormous national assets to be protected and nurtured.
That doesn’t happen unless investors have confidence in the integrity of the markets, and of the financial intermediaries with whom they do business. So that really constrains a lot of the potential polticalisation of the agency’s agenda, which I think is a really good thing. It gives us consistency, which is good for business and good for investors.
What would you say are the biggest pressures facing the SEC currently?
There are always resource pressures on the agency. In part, because unlike every other financial regulatory agency except the CFTC, it is not self-funded; it has to go to Congress for an appropriation. That means its needs are not as easily met as say at the Office of the Comptroller of the Currency (OCC) or the Federal Reserve (Fed), where if they have a crisis and need to bring in 50 people, they can bring in 50 people. The SEC can’t do that without Congressional approval, so resources are always a consideration. The markets grow quickly, they are large, they are complex and intertwined with other markets and other jurisdictions and there is a tonne of innovation for the SEC to keep up with. All of that requires resources and skill sets that are not always easy to acquire in government. That pressure is always there.
There are also some political pressures and I think that, while they are doing well to withstand them, they can still have consequences on how the agency does its work and how effective ultimately it is. I don’t see evidence that it is a huge problem, as the SEC has always treasured its independence and I think that that continues to be the case today.
The innovation in the markets is always a challenge for the agency too. When I arrived we didn't have some of the skillsets that I thought we needed to be the best possible capital markets regulator that we could. We brought in people with really varied backgrounds; more economists, people from ratings agencies, trading desks, those with operational experience, who would have a broader perspective on capital markets and enable us to be more current and innovative regulators.
Do you think that the current administration has adequate tools for identifying emerging risks and minimising the regulatory arbitrage?
The SEC deals with the need to keep up with risk through a couple of mechanisms. One is through the Financial Stability Oversight Council (FSOC), which was created under the Dodd-Frank Act and is a college of regulators of financial institutions from the Fed, OCC, Federal Deposit Insurance Corporation (FDIC), CFTC, SEC, insurance regulators and others.
That group meets regularly and produces an annual report of emerging risks to the financial system. It is a really insightful delineation of risks on the horizon that regulators collectively need to be thinking about, and will be held collectively accountable for addressing. It is a useful tool because you get the different perspectives from regulators who are responsible for different institutions or parts of the economy. Another tool the SEC has to identify risks is its advisory committees. It is very difficult to have enough in-house resources to cover markets as broad, innovative and diverse in terms of product mix as ours. If you can rely on industry expertise that can help you - not all the way, but a good part of the way. There are advisory committees focused on market structure, investor protection, fixed income markets, small business capital formation. Having a stable of people with expertise in those areas who can be called upon to help surface issues and risks or to provide education to inform the staff, is really helpful to the agency.
On the whole how do you think the financial system is in better shape than it was when you were last in public office?
I don’t think there is any question about that. If you recall, I was nominated a week after Bernie Madoff was arrested and we were still in the midst of a financial crisis. Five major investment banks had either failed, been acquired or converted in to bank holding companies to put them into stronger regulatory hands. There were a lot of vacancies at the SEC, because there was a change in administration. There had been virtually no spending on technology for the best part of the prior decade. The press was very negative and Congress was highly critical of the agency.
The Reserve Primary Fund had broken the buck, and caused a run on money market funds, which only eased when the Treasury and the Fed set up a guarantee fund. There were a lot of issues within the SEC that we worked steadily to resolve. Building a great team of senior leaders, bringing in new skill sets, redirecting resources to technology, accepting responsibility for the failure to stop Madoff, providing training for our employees and re-focusing on an investor protection agenda.
Generally, throughout government you have seen regulators step up and be much more skeptical and much more consistent in how they look at and deal with problems within the institutions they are responsible for. We obviously engaged with Dodd-Frank, and while there is lots about it that is imperfect, there is a lot that is good about it that really has resulted in a stronger, more resilient financial system. We have more capital in the system, higher quality capital, transparency in areas like hedge funds, and other private funds that we never had before. We have central clearing of over-the-counter derivatives, which has provided transparency and stability and removed a significant amount of credit risk from the system.
One of the biggest talking points in the financial industry is the regulation of cryptocurrencies and the use of blockchain. If you were in charge now what approach would you take?
I think SEC chairman Clayton is doing a lot of the right things there. My personal view of this is that it will come to tears, and that people who can ill afford to will lose a lot of money in the trading of cryptocurrencies, tokens and coins, through the initial coin offering process where people are not getting the benefit of the protections of the federal securities laws.
Aggressive enforcement is really required here. And I think making it clear that the people are not exempt from having to operate under the Federal securities laws just because they are using a distributed ledger technology. That is all great, but it doesn’t make these instruments not securities, and if they are securities people are entitled to the protection of the Federal securities laws. In some cases, they aren’t getting it, and I think there will be a reckoning that will be very painful for people at the end of the day.
"It will come to tears, and people who can ill afford to will lose a lot of money in the trading of cryptocurrencies, tokens and coins"
Recently you’ve been doing a lot of work on the financial risks of climate change, could you tell me why you think this is such an important cause and how any issues can be prevented?
I think it is a critically important issue. In recognition of the potential for climate change to present a risk to financial stability, the G20 asked the Financial Stability Board to convene an industry task force , to look at whether we could improve the disclosure around climate related financial risk. Such disclosure would enable investors, bankers, underwriters, and insurers, to make more informed investment, lending and underwriting decisions about companies based on their recognition of climate risk and their mitigation and management of climate risk.
The FSB put together a task force of 32 people from G20 jurisdictions and they wisely asked Mike Bloomberg to chair the taskforce. I help to lead the work on behalf of Mike. We have developed, after many hundreds of hours of consultation with industry and others, a framework that will allow public companies, banks, asset owners and asset managers and insurance companies to disclose climate related financial risk using four pillars of basic disclosure; governance, risk management, strategy and metrics and targets. Our Report provides extensive general and industry-specific guidance for companies to assist them in developing their disclosure. Tools and resources are also available on our website. We have taken a very scalable approach that works well in virtually all corners of the globe. The disclosure framework has been endorsed by more than 275 global companies to date. Those companies are beginning the process of making public disclosure along the lines of the task force recommendation.
You’ve broken many ceilings so far in your career, you were the first female to lead the SEC and then the first to lead both major securities regulators. What one piece of advice would you offer young female lawyers starting out their careers?
I would probably give the same advice to young men and young women. To me, every success I have ever had has been because I have had an amazing team of people around me. It is not going to sound tremendously profound, but my advice would be to be a good team player, be good colleague. Of course, you have to stand up for yourself, fight for what you believe in, but also you need to be part of a team because that is the way we accomplish things and get them done.
That means sometimes compromising, never on your principles or your core beliefs, but working with people or having their back and being willing to be part of something that is bigger than you are. That requires operating with what I call the three h's; humanity, which being a decent person to work with who exhibits kindness and support for your colleagues; humility, which is understanding what you know and what you don’t know, being clear and truthful about that, being a sponge and learning everything you possibly can; and honesty, which is obvious, but really critical to anyone's success. Despite some of our politics today - it still counts and still matters to be an honest person who others can rely on and have faith in.
In recent years you made the move to the private sector, what is the biggest difference that you have seen from the public sector, and have your view and opinions changed in the subsequent years?
Not really. I think people in the public sector and the private sector fundamentally want to do the right thing, and they fundamentally want to be constructive, productive, supportive members of their community. Whether it is the business community, or public service. When I left government after many years in multiple roles, I felt real sadness in not going into an office every day, working in the best interest of the American people. That is going to sound a little trite, but it is absolutely what motivates you in government. You are a steward of the taxpayer’s funds and future, you are responsible for delivering for the American people in a way that will hopefully make their lives better, make our country stronger. I miss that a lot.
What I have discovered is that you can find that same gratification in the private sector. The work I do with Mike Bloomberg on the Taskforce on Climate-related Financial Disclosure gives me every bit as much satisfaction as anything I did in government when I was a public servant. It is an incredible opportunity and honour for me to be able to do this work. So, I think there are of course differences around the edges between government and the private sector, but fundamentally I think they aren’t that great; we can really all work in the public interest in either place.
Now you are at CVS you deal with have to work with regulators. Knowing what you do now, if you could give your former self some advice what would it be?
I guess it would be to make sure that as a regulator you take the time to understand the perspective of people in the business, and also the real life, on-the-ground implications of your policies for how the business is run as well as how they will affect real people. Which is not to say you shouldn’t develop the policies as necessary, and in the public interest, but figure out a way to do it and to implement it that is actually achievable. I think we are seeing some of that now with the re-write of Dodd-Frank. Without going into detail about how I feel about each possible change, you have to be open to the possibility that was written might need to be tweaked, or massaged, in order to make it actually workable.
I think that is where the biggest disconnect comes between the government and the private sector. We might even share exactly the same goals, but how we get there is different. Business has a very definite perspective about making it fit into the way they do business, government sometimes has the perspective about making sure we get the right result and is inflexible about how people get there. I think that is where we need to build a bridge, so that we can achieve the policy goals as regulators in a way that is actually doable for business.
"We need to build a bridge, so that we can achieve policy goals as regulators in a way that is actually doable for business"
Finally, what achievement from your career are you most proud of, and what is your biggest regret?
I guess, I would say two things. I am really proud of the work we did at the SEC putting investors at the centre of all of our work and strengthening the agency’s capabilities. We achieved budget increases every year, record enforcement numbers every year, the most rule writing done since the agency was created in the 1930s. I think with an amazing team of people from the very top to the very bottom of the agency, we stabilised it and enhanced its reputation. I am enormously proud of that, fully cognisant that I personally had little to do with it, it was the 4,000 men and women of the SEC who made that happen. But, I am really proud to have been able to be their leader during that period of time.
The other thing I would say is the task force for climate related financial disclosure. We took an idea and figured out how to make it a reality. To develop a disclosure framework that has been broadly embraced, to advance the understanding of the risk to companies from climate change, and hopefully enable investors and others to allocate their capital in ways that supports businesses doing the best job of managing and mitigating climate risk. That is really important at this time in history.
There are always regrets. You always leave every position with an unfinished agenda, and things you would have liked to accomplish, and hopefully you can make that up in whatever you go on to achieve next. Without listing my regrets, I would say I certainly have some, but there are many, many more things that I feel really good about.