Mr. Obama’s Letter to Santa For His New SEC Chairwoman

The children are all finishing their letters to Santa Claus, hoping that on Christmas morning they will find those special toys they have wanted for so long in their stockings and under the tree. President-elect Barack Obama is also writing to Santa this week in the hope of delivering on his promise of change to the country. One of his letters is for his nominee as SEC Chairwoman, Mary Schapiro. The President-elect asked Santa to put three things in the Chairwoman’s stocking, but they are big items:

Tone at the top: He wants the SEC to once again be the top cop of Wall Street. That begins at the top – the White House and the SEC Chairwoman’s office. The tone at the top must tell all that the SEC is back and on patrol, walking the beat, not just of Wall Street, but in the board room and across the country. If there is wrong-doing, those responsible will caught and brought to justice. If market professionals are violating the rules, they will be stopped. If corporate America is fudging the account principles, they will be discovered. If insiders are abusing their trust, they, along with all who are violating the rules, will be found in a timely fashion and promptly brought to justice. This message must come from the top and be clear, unequivocal and fairly delivered, not just on the first day, but every day.

Scrutiny at the bottom: Those in the trenches have to get the message from the top and apply it. Intake is key and effectively conducting the initial, informal inquiry is critical. When investor complaints come in, they have to be carefully reviewed. When information is obtained from the SRO’s, it has to be reviewed and carefully analyzed. When there are media reports raising questions about matters, they must be evaluated and followed up. At the same time, initial informal investigations, which the staff has the authority to open and close without asking the Commission, must be carefully conducted, the facts and data analyzed and rapidly pursued to make sure that the proper conclusion is reached. Intake and the initial investigations are critical to effective enforcement.

Economy in the middle: It is essential that the mid-level supervisory staff take a hands-on approach and use their expertise to make sure that the staff doing intake and conducting the initial investigations is searching out all potential leads, that the evidence is being carefully analyzed and at the pertinent legal issues are being fully evaluated. Mid-level staff must avoid the temptation to get caught up in reviewing memoranda which summarize information, rather than taking a hard look at actual pieces of key evidence. They must resist falling into a routine of running from meeting to meeting, leaving the actual collection and analysis of evidence – that is, the real investigation – to the most inexperienced staff members. It is thus essential that the staff operations be refocused to a more hands on approach. This will ensure that tone from the top and the scrutiny at the bottom come together to create effective enforcement.

If Santa fills Ms. Schapiro’s stocking with tone at the top, scrutiny at the bottom and economy in the middle, the President-elect will bring the change he promised to the Securities and Exchange Commission.