Financial News (The Wall Street Journal)  (December 18, 2008) -- President-elect Barack Obama has chosen Mary Schapiro, chief executive of a securities-industry regulator for securities firms, to lead the Securities and Exchange Commission, according to two Democratic officials.

Ms. Schapiro, 53 years old, will take over an agency beset by problems, from its failure to catch red flags in the alleged $50 billion Madoff fraud to accusations of lax oversight of Wall Street banks. The announcement is expected Thursday in Chicago.

She was credited with beefing up enforcement while at the National Association of Securities Dealers and guiding the creation of the Financial Industry Regulatory Authority, which she now leads. But some in the industry questioned whether she would be strong enough to get the SEC back on track.

The SEC has been overshadowed in dealing with the 2008 market meltdown by the Federal Reserve and U.S. Treasury Department, and its very existence is in danger as Congress weighs a big regulatory revamp expected next year. Some officials have suggested reassigning its responsibilities to other agencies or merging it with the Commodity Futures Trading Commission.

Under current chairman Christopher Cox, the SEC has been dogged by criticism that it hasn't acted forcefully to police securities-industry risk taking, greasing the skids for the crisis that resulted in the collapse of two major firms, Bear Stearns Cos. and Lehman Brothers Holdings Inc.

More recently, Mr. Cox has sought to suggest the agency was lax before his arrival in 2005, questioning why the agency didn't respond to allegations of possible fraud at the investment operations of Bernard Madoff dating back to 1999.

The Obama team has said little about the SEC specifically, but transition officials say they favor a systemic risk regulator with oversight of all large and important financial institutions.

Ms. Schapiro, an independent, arrived at the NASD in 1996 in the wake of a scandal over the agency's failure to police brokerage firms. The SEC accused the firms of conspiring to fix artificially wide "spreads" between "bid" and "ask" prices in the market for small stocks at the expense of individual investors.

She rose to head the NASD and oversaw its merger with the regulatory unit of the New York Stock Exchange counterpart to create Finra.

Robert Glauber, a former chief executive of the NASD who is a visiting professor at Harvard Law School, said Ms. Schapiro's "vast and broad experience" as a regulator will be "invaluable as the regulatory restructuring process goes forward."

Robert Banks, a director of the Public Investors Arbitration Bar Association, an industry group for plaintiff lawyers, had a more critical view. He said that under Ms. Schapiro, "Finra has not put much of a dent in fraud," and the entire system needs an overhaul. "The government needs to treat regulation seriously, and for the past eight years we have not had real securities regulation in this country," Mr. Banks said.

Since Ms. Schapiro took over Finra in 2006, the number of enforcement cases has dropped, in part because actions stemming from the tech-bubble collapse ebbed and the markets rebounded from 2002 to 2007. The agency has been on the fringe of the major Wall Street blowups, and opted to focus on more bread-and-butter issues such as fraud aimed at senior citizens.

Out of the gate, Ms. Schapiro faces potential controversy. In 2001 she appointed Mark Madoff, son of disgraced financier Bernard Madoff, to the board of the National Adjudicatory Council, the national committee that reviews initial decisions rendered in Finra disciplinary and membership proceedings. Both sons of Mr. Madoff have denied any involvement in the massive Ponzi scheme their father has been accused of running.

Ms. Schapiro has said she decided to get into regulation as a law student when she saw silver prices surging amid alleged manipulation. When she was chairman of the Commodity Futures Trading Commission in the mid-1990s, one of her biggest challenges was grappling with the downfall of Barings Bank PLC because of errant trading.

"Mary knows the industry, she knows the commission, she knows the Hill and I think she'd be an excellent choice," said Jerry Isenberg, a securities defense lawyer at the firm of LeClairRyan.

New York Sen. Charles Schumer, a key legislator on financial issues, said Ms. Schapiro is "the kind of strong and experienced regulator that we very much need in these times. I believe her nomination could be approved quickly and without controversy in the Senate."

Becoming SEC chief means a pay cut for Ms. Schapiro, who earned $2.1 million counting deferred compensation at NASD in 2005. The SEC job pays $158,500 a year. In late 2006, opponents battling the regulatory merger with the NYSE criticized the high pay levels for NASD staffers.

Ms. Schapiro oversaw a 2005 investigation into gift giving and entertainment on Wall Street, a probe that rocked Wall Street and has resulted in many charges. The probe uncovered a number of instances of over-the-top entertaining. Ms. Schapiro will be the first woman to serve in a permanent role as SEC chairman. She will have to give up her board positions at Duke Energy and Kraft Foods for the SEC job.

Mr. Cox, a former Republican congressman from California, arrived in August 2005. His consensus approach smoothed hostilities left by the tenure of predecessor William Donaldson, but it also effectively gave more control to then-Commissioner Paul Atkins, a Republican who publicly railed against the enforcement division for being too aggressive against companies. Mr. Cox sought to approve all rules by unanimous decisions, so if Mr. Atkins didn't go along, Mr. Cox would shelve the issue.

Mr. Cox began a pilot program that required enforcement attorneys to seek permission from the commission before negotiating penalties against corporations. Previously the staff would negotiate a settlement and bring it to the commission for approval. The pilot program had the effect of slowing cases, SEC enforcement attorneys say. The SEC maintains it has aggressively pursued enforcement cases and extracted record fines from companies.

The SEC chief was criticized for attending a birthday party and being absent from meetings during the weekend when Bear Stearns Cos. was on the verge of collapse and was sold to J.P. Morgan Chase & Co. Mr. Cox said he was involved in the decisions involving Bear Stearns. Since the summer, Mr. Cox has taken a more active stance through emergency measures to limit bearish bets on financial institutions and calling for oversight of derivatives and a merger of the SEC with the CFTC.

The SEC has taken a public pounding from its inspector general, who found the SEC missed many red flags in its oversight of Bear Stearns.

—Susanne Craig and Laura Meckler contributed to this article.