Obama's SEC pick under pressure to heal agency

WASHINGTON (Reuters) - President-elect Barack Obama's pick to head the Securities and Exchange Commission faces the daunting task of repairing the agency's reputation and steering it through a major overhaul of U.S. financial regulation.

The SEC's reputation is in tatters after lapses in oversight and Obama is entrusting veteran regulator Mary Schapiro with the job of restoring investor confidence as well as helping clean up the financial mess.

Under current SEC Chairman Christopher Cox, a California Republican, the agency has been criticized by some lawmakers for failing to protect investors and for not preventing the demise of storied investment firm Bear Stearns.

In September, Republican presidential nominee John McCain said he would fire Cox if elected.

The latest blow to the agency, which was created during the Depression, was financier Bernard Madoff's alleged $50 billion fraud. That forced Cox this week to ask the agency's internal watchdog to probe the SEC's conduct in the case.

"Schapiro will surely hit the ground running and will present a new and reassuring face at the helm of an agency that is now at its lowest point on the public confidence scale," said Jim Cox, a securities professor at Duke Law School.

Schapiro has spent more than two decades supervising financial markets. A former SEC commissioner, she became chairman of the Commodity Futures Trading Commission during the Clinton administration, and now is chief executive of the Financial Industry Regulatory Authority, a broker dealer watchdog.

The 53-year-old lawyer has a reputation for integrity and putting investors first, according to investor groups, business lobbyists and former SEC staffers.

"The only way to restore the trust that has been lost is through effective, thoughtful reform of our regulatory structure and the consistent, robust enforcement of our financial regulations," she told a Chicago news conference on Thursday. "This will be my top priority."

SEC-CFTC MERGER EYED

But some questioned if Schapiro is tough enough.

"I can't point to any instance that made me think that she earned a reputation as a zealous regulator," said Cox, the securities professor and no relation to the SEC chairman.

Another securities expert said Schapiro is not an activist. "To the extent that the SEC needs major changes, I am not sure she is someone who will shake things up. She is very much in the mainstream," said the source who requested anonymity.

Schapiro's nomination along with Obama's pick for CFTC chief, Gary Gensler, also signals the Obama administration may try to merge the CFTC and SEC. Gensler, a former Treasury Department undersecretary, is an adviser on the Obama transition team who has been analyzing securities regulation.

"Gensler is close to the Obama administration on basic policy goals. I am pretty sure he was brought in to facilitate the marriage of the two agencies," said John Coffee, a professor at Columbia Law School.

A merger of futures and securities regulators faces stiff opposition from some lawmakers on the Senate and House agriculture committees, which have jurisdiction over the CFTC. The SEC is overseen by the Senate Banking and House Financial Services committees.

Rep. Collin Peterson, a Democrat who heads the House Agriculture Committee, has long opposed joining the two agencies. "A proposal to merge the two agencies would face an uphill battle," Peterson warned earlier this year.

But now that the financial crisis has highlighted serious shortcomings in the U.S. regulatory structure, an Obama administration may have an easier time combining the two agencies.

Jay Brown, a securities professor at Sturm College of Law, said the choice of Gensler and Schapiro is a sign that Obama wants more government oversight of derivatives, entities involved in the securities markets, brokers and those engaging in investment banking services and investment advisors.

The SEC loosely supervised investment banks like Lehman Brothers, prior to its demise, in a voluntary program.

Some big investors say they are anxious for a SEC chief who will push for more investor-friendly agenda. Shareholder activists want an easier way to nominate board directors and want more say on executives' compensation packages.

"Her views on currently hot corporate governance issues are less clear," said Rich Ferlauto, director of pension and benefit policy at labor group the American Federation of State, County and Municipal Employees.

(Reporting by Rachelle Younglai; Editing by Tim Dobbyn)