On March 12 Securities and Exchange Commission Chair Mary Jo White publicly returned fire for the first time on the charge from outsiders and two of her fellow commissioners that her agency is soft on Wall Street.
Cut through her rhetoric, however, and what she seems to be implying is: "The SEC trusts Wall Street."
Here's the background. The Department of Justice has fined major Wall Street firms for serious violations. The firms have settled by paying billions of shareholder funds in penalties. These infractions trigger other sanctions, including the loss of certain privileges at the SEC. But the SEC has generally waived these sanctions. Commissioners Kara Stein and Luis Aguilar have voted against these waivers in several cases, arguing that waivers dilute the deterrence effect of the automatic sanctions, among other reasons. Stein, Aguilar and White are three of the five commissioners of the SEC.
In a March 12 speech at Georgetown, Chair White drew a line in the sand: These sanctions should not be viewed as deterrence. She explained:
It must be emphasized ... that it would not be an appropriate exercise of our authority to deny a waiver to further punish an entity for its misconduct or history of misconduct, or in an effort to deter it or others from possible future misconduct, by letting stand an automatic disqualification where the circumstances do not warrant it.
White undoubtedly penned these remarks well before the eve of the speech and advantaged the prodigious talent on the SEC staff to buttress her legal case. However, in the written speech the assertion just quoted contains a footnote to a rule the SEC approved in July 2013. White joined her four commissioners to approve this rule. However, the SEC's explanation of its rule in fact contradicts her point. The rule actually speaks directly about deterrence and makes reference to it five separate times. Here's an example:
Finally, the passage of the rule, through the deterrent effect of a potential threat of disqualification, could have the indirect impact of reducing the number of bad actors in the securities markets and the conduct resulting in sanctions that trigger disqualification.
White's speech follows previous speeches by Stein and Aguilar. In April, for example, Stein contended:
Sound policy arguments have been made that we need more tools to police and regulate our markets. But, we also need to ensure that we correctly and fairly utilize the tools we have. These disqualification and bad actor provisions have the potential for deterrence at large institutions that no one-time financial penalty could ever wield. Yet, we repeatedly relieve issuers of the supposedly automatic consequences of their misconduct.
Strictly enforced rules serve as a deterrent. But as Stein has pointed out, when even repeat offenders escape the mandatory disqualification, deterrence is undermined.
Significant congressional leaders side with Stein and Aguilar, and in fact Rep. Maxine Waters (D-California), the ranking Democrat on the House Financial Services Committee, has promised to introduce legislation to limit the use of waivers and bolster the deterrence effect. Sen. Sherrod Brown (D-Ohio), ranking on the Banking Committee, has also challenged the SEC's's use of waivers. From high altitude, Wall Street is escaping a critical component of true justice.
In addition, there is one more troubling element to White's position. White says that the only factor that the SEC should consider when thinking about granting a waiver is whether the firm can honestly provide the services that the sanctions would otherwise interrupt. That's a precarious place for the SEC. She's essentially asking her fellow commissioners to enter the attestation business. That's a process used in enforcement at companies where CEOs are required to attest that their firms comply with accounting or other rules. Suffice it to say CEOs generally don't welcome such attestation requirements. At the end of a review, the SEC must decide whether it trusts the firm. The simpler route is to ignore waiver requests. The default position should be what the law, rules, and the DOJ dictate: loss of privileges. If a firm can build an independently verifiable case that it can honestly serve the market in a division separate from where the violations took place, then the SEC might grant a waiver.
Short of that, the SEC should not be saying, "We trust Wall Street."