By Robert Fusfeld
(Robert Fusfeld is on the faculty of the Institute for Public Policy Studies at the University of Denver where he teaches graduate and undergraduate courses. From 1975 until his retirement in 2006 he was an SEC enforcement attorney and managed the SEC's Denver office trial unit for 15 years. He publishes a blog commenting on SEC administrative proceeding decisions at www.secteaparty.blogspot.com ).
This week brings multiple data points that show the breakdown of the SEC's enforcement program and its misguided futility.
Why does the SEC persist in its misguided enforcement priorities in the face of overwhelming evidence that the program has failed in a basic measure of success - the ability to deter future wrongdoing?
My public policy students are well aware of the corrosive nature of confirmation bias and information bubbles where policy makers persist, and persist, and persist in folly.
Let us examine some recent data points. It has been reported by the Wall Street Journal that the SEC enforcement staff has reached a tentative settlement with JPMorgan Chase in a mortgage bond fraud case. According to the report no individuals will be charged but the company will face a "significant financial penalty."
It is time that the SEC commissioners ask themselves and their enforcement staff some hard questions about the nature and direction of the agency's enforcement program.
• Is there any evidence that serial "significant financial penalties" deter future wrongdoing by major financial institutions?
• Why has the enforcement staff not recommended that the Commission seek significant limitations on the activities of a major firm that is a serial violator of the securities laws such as a bar from underwriting for a lengthy period?
• Do major firms that have proven themselves to be serial violators have some unwritten exemption from the type of enforcement penalties routinely applied to "mom and pop" firms with a single violation — namely a revocation of registration?
Unfortunately it is clear that the Commission does indeed have a double standard when it comes to applying the securities laws. Get big and rich enough to afford a mega-penalty and you become immune from meaningful sanctions.
How do we know this. Well this week the Commission issued a sternly worded appellate opinion in which it upheld a FINRA bar based on a seven-year course of conduct by a registered rep who failed to disclose various judgments, bankruptcies and tax liens. This was of course no surprise. The Commission applied the common sense "grandmother" test — would you want someone with this history of bad conduct having a license to manage your grandmother's money? Of course not.
But consider the language that the Commission used in upholding the FINRA bar.
• "A representative's truthfulness in answering the financial disclosure questions on Form U4 is a particularly critical measure of fitness for the industry because a commitment to accurate, complete, and non-misleading financial disclosure is central to any securities professional's responsibilities."
• [Respondent's] actions also reflect poorly on his commitment to his regulatory responsibilities in general."
In short, the Commission enforcement program seems to have forgotten the following language in Section 15(b) of the Exchange Act. In case the Commissioners need reminding here are the remedies the Commission has available to it that it seems unwilling to employ against large firms.
The Commission, by order, shall censure, place limitations on the activities, functions, or operations of, suspend for a period not exceeding twelve months, or revoke the registration of any broker or dealer if it finds … that such censure, placing of limitations, suspension, or revocation is in the public interest…