Will Obama's 'Change' Extend to the SEC?

At the SEC, financial reform’s proponents fear a missed opportunity.

WASHINGTON, DC - MAY 22: Securities and Exchange Commission Chairman Mary Schapiro (L) and Futures Trading Commission Chairman Gary Gensler testify before the Senate Banking, Housing and Urban Affairs Committee about derivatives reform in the Dirksen Senate Office Building on Capitol Hill May 22, 2012 in Washington, DC. The committee questioned the regulators about 'reducing systemic risk and improving market oversight' in the wake of the Dodd-Frank Act.
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Elections are blunt instruments that can have sharp consequences. For investors, a possible consequence of President Obama's re-election started coming into focus Tuesday, with the long-expected announcement that Mary Schapiro would step down after nearly four tumultuous years as head of the Securities and Exchange Commission.

President Obama's decision about who replaces her in the long term will help clarify whether his regime goes down in the books as more transactional than transformational. Most observers suggest that you not bet the house on transformation.

For now, Schapiro has been replaced for the remainder of her term, which runs until January 2014, by commissioner Elisse Walter. Walter is no one's idea of a boat rocker, so the chief frustration of Schapiro's critics—that her SEC did not move aggressively enough to tame a Wall Street run amok—is not likely to lift anytime soon.

Unless, of course, Obama surprises the world and nominates a serious reformer for a full five-year term when Walter's run ends a year from now. The odds of that? Not high, say people who favor a more aggressive SEC. The names of "likely" nominees—such as Treasury official Mary John Miller and former Citi executive Sally Krawcheck—do not inspire hope among folks like Barbara Roper, director of investor protection for the Consumer Federation of America. "If you put together a list of the leading advocates for financial reform," she says, "their names would not be on it."

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They would, in effect, be an extension of Schapiro, says Jeff Connaughton, author of a new, highly praised book whose title, The Payoff: Why Wall Street Always Wins, pretty much tells you where he stands. Schapiro, says Connaughton, "didn't want to buck Wall Street in any significant way." On the other hand, he says, "I really don't want to pile on as she's on the way out the door. I'm sure it was an exhausting four years for her."

To be sure, Schapiro took the helm at an unusually difficult moment, and she can claim some sort of legacy. For starters, the SEC still exists. The Madoff scandal broke under Schapiro's predecessor, Chris Cox. But the SEC's passivity despite repeated warnings about Madoff (recounted in the infuriating Jeff Prosserman documentary Chasing Madoff), produced calls from Congressman Ron Paul and others to abolish the agency, or at least put it on a very tight leash.

Schapiro's SEC has also participated in the sweeping federal crackdown on insider trading that nailed former Goldman Sachs Director Rajat Gupta and former hedge-fund manager Raj Rajaratnam.

But Schapiro's critics tend to focus on the undone: the backlog of rule-makings necessary to implement Dodd-Frank financial reforms, the failure to prosecute key figures allegedly responsible for the financial crisis (former Countrywide chief Angelo Mozilo comes to mind), inaction on "high-frequency trading," which accelerated the "flash crash" of May 6, 2010 and could, many fear, produce a future meltdown.

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Even conservatives not apt to lament bottlenecks in the regulation factory have lukewarm views about Schapiro. "I think the direction she was moving was that of many additional regulations and very often going to the point of micro-management," says David John, who studies retirement issues and financial institutions for the Heritage Foundation.

Ultimately, says Connaughton, Schapiro "was a regulatory creature with a 20-year history regulating Wall Street, and she was just not in my view bold enough."

So, then, who is? There are folks out there who might, as Connaughton puts it, "put the fear of God into Wall Street." The influential MIT economist Simon Johnson—an ardent proponent of taming Wall Street power—suggests Neil Barofsky, former inspector general for the Troubled Assets Relief Program (TARP); Dennis Kelleher, president of the nonprofit market watchdog Better Markets, which seeks thorough implementation of Dodd-Frank; and Sheila Bair, former head of the FDIC.