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Heading the SEC Is a 'Thankless Job': Harvard's Fox

Mary Schapiro, who resigned as chairwoman of the Securities and Exchange Commission on Monday, may be best remembered for what she did not accomplish during her almost four-year tenure at the federal watchdog agency.

Justin Fox, editorial director at Harvard Business Review, says Schapiro's "signature moment" at the SEC was when she fought to reform money market mutual funds. These funds came into focus after the $64.8 billion Reserve Fund "broke the buck" following the 2008 collapse of Lehman Brothers. Even though Schapiro's proposal was "rational" — it advocated a floating NAV and would have required money market funds to hold cash reserves — she ultimately failed to convince the agency's four commissioners to support her. The mutual fund industry, which vehemently opposed Schapiro's efforts, lobbied Schapiro's colleagues "so hard" to defeat the measure, Fox notes, and it was never brought to a vote.

This case underscores the internal flaws at the SEC, Fox says. Its current framework — one chairperson and four commissioners (two Democratic, two Republican) — "creates this opportunity for lobbying" that would not "exist if there was one person in charge," Fox argues. Moreover, the SEC's mandate does not give it formal control or authority over the most speculative parts of the market, such as derivatives.

"The SEC is no longer the central player that it clearly was when it was created in the 1930s," Fox says. "It seems like a pretty thankless job."

Elisse Walter, a Democrat and SEC commissioner since 2008, was tapped as Schapiro's replacement by the Obama administration. She will serve as head of the SEC until at least December 2013. Several names have already emerged as possible frontrunners for the top spot if Walter's term is a short one: Sallie Krawcheck, a former top executive at Citigroup and Bank of America; Mary Miller, a senior Trasury Department Official; and Richard Ketchum, chairman of Finra, Wall Street's self-regulatory group. Fox says Krawcheck would be a "big name" at the agency but her nomination would likely be criticized by the banking industry because of her recent comments on executive pay. Krawcheck has written editorials and appeared on cable news shows advocating a compensation structure based on fixed income as opposed to an equity-based system. In a recent interview with Harvard Business Review, Krawcheck said:

"And so I start, number one, with the idea of compensating bank management not just in equity, but in order to tilt their risk profile of the individuals in some combination of equity and fixed income, fixed income investors being much more risk averse, with the idea being to do it based on the underlying capital structure of the company. So here's the idea, which is, if a bank is 100% equity financed, pay the senior management team 100% equity. Interests are very much aligned."

For now, the SEC will be ruled in a similar tone and manner under Walter's leadership; according toThe New York Times Walter has been a longtime ally of Schapiro. Harvey Pitt, a former SEC chairman during the George W. Bush years, writes in the Wall Street Journal that "dangers lurk around every corner" at the SEC, and he lists problems the agency needs to tackle immediately, such as dysfunctionality and compromised independence.

Overall, Fox says Schapiro did the best she could at an agency that has experienced recent periods of tumult.

"I think she did a pretty good job in a difficult situation," he says. "She tried really hard and I think she was good in a lot of ways."

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