Could the SEC Actually Get Some Teeth?

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The Securities & Exchange Commission has some awesome attributes. However, in some areas it has utterly failed us. Hopefully that's about to change, though.

Let's start with the awesome part: The SEC is a priceless repository of key information for investors. I worked at a subcontractor for the SEC in the early '90s. I remember when SEC documents were distributed in paper form. I know from experience that a physical Form S-4 merger document can make quite a doorstop. I also remember the then-revolutionary EDGAR database in its infancy -- an amazing improvement in individual investors' access to company information.

In other words, today's individual investors have an amazing depth of information about potential investments.

However, the SEC falls short in other functions, one of which is extremely significant. After the Depression, the SEC formed to protect investors. When it comes to truly keeping companies' proverbial feet to the fire, it simply hasn't done it lately. The entity has often let companies off scot-free. Even when companies have hit the SEC radar, they've been allowed to settle without admitting wrongdoing.

Recently elected SEC Chair Mary Jo White has made an interesting step in a different direction. In some of its enforcement cases, the agency will now pressure selected companies to admit to wrongdoing. That's far different, and much more impressive, than the old way: letting companies pay up and settle, and never making them admit to or deny having done anything wrong at all.

Don't expect an impressive fireworks display yet
Granted, while the SEC might get some teeth, it's not exactly a full set. In most cases, status quo will still apply. It's a step in the right direction, though, and it may pressure other agencies like the FDIC and the Department of Justice to step up their own practices.

White's move highlights an important, haunting question: Why weren't banks' top managements held more accountable for the financial crisis through real ramifications? In 2009, Tom Gardner, co-founder here at the Fool, had some serious words about the concept of actual jail time for some wrongdoers. The big banks' reckless, risky behavior affected every American one way or another.

These days, the term "too big to fail" has morphed into "too big to jail." Consumer advocates like Massachusetts Senator Elizabeth Warren have been fighting this mind-set among regulators for years.

My Foolish colleague Matt Koppenheffer recently pointed out that some bankers have recently been punished by the SEC for fraud, but they're just community bankers. He went on to explore the facets of why the big ones, the ones we all feel are most culpable for the most damage, have remained unscathed.

The SEC's change will apply to the worst cases, where there's intentional misconduct, harm to many investors, and obstruction of investigations. We know the downsides of this; for example, it's hard to prove intent. "I didn't know" proved to be a major, albeit lame, excuse when the financial crisis put the spotlight on Wall Street's top brass.

Penny-ante penalties
There are many reasons that financial settlements with no admission of wrongdoing are annoying, even beyond the fact that nobody goes to jail or otherwise pays for poor behavior or leadership. These financial hits are usually minute in the grand scheme of big companies' businesses, and that's no disincentive. In other words, such actions not only lack teeth, they hardly even qualify as a slap on the wrist.

Unethical or even criminal behavior can be more profitable than taking the moral high ground, particularly since the financial ramifications tend to be weak at best.

In one example, Wal-Mart (NYSE: WMT  ) has been dealing with regulatory investigations into allegations of international bribery. At this juncture, the giant has disclosed in its regulatory filings that it does not believe that the costs associated with that ongoing situation will be material to its business. Somehow, that's not surprising.

Bank of America (NYSE: BAC  ) has been landing in heaps of trouble lately, bringing back memories of the worst things about the financial crisis and housing crash. The most recent outrage has been allegations that it paid bonuses and even gift cards to employees who foreclosed on homeowners, lying to borrowers and its government rescuer. Meanwhile, New York has also sued HSBC (NYSE: HSBC  ) for ignoring state law requiring that banks give homeowners opportunities to modify their loans and avoid losing their homes.

New York's attorney general could also file lawsuits against other banks, including Bank of America, for violating the terms of a settlement related to handling home loans.

Strengthening pressure from every side could help avoid crises and unethical or fraudulent behavior in the first place.

Unleash the watchdogs
Many of us are looking to the SEC to change a lot of things. To give credit where it's due, though, the SEC does have some impressive new tools for investors. The say-on-pay mandate has been a major step for shareholder rights. Proxy votes are finally getting the attention of many corporate managements and boards. Just this week, Target almost lost a say-on-pay vote; its board would be wise to rethink compensation policies since nearly half its shareholders believe CEO compensation is too high.

JPMorgan's Jamie Dimon may have won the vote regarding his dual roles as chairman and CEO, but the fact that it was big news -- not to mention, that there was a possibility shareholders could shoot his chairman role down, even in a non-binding vote -- is a victory of sorts for corporate governance awareness.

Meanwhile, GMI Ratings recently released a report pointing out that investors who spot and heed red flags that could point to fraud could significantly boost their returns. GMI screened out 25% of Russell 3000 companies that received the lowest scores in its fraud-detection analysis, and found a 29% increase in portfolio value over a 10-year period.

In other words, investors need to protect themselves from investing in shoddy businesses, particularly the ones that could end up on a worst-case scenario hit list. And of course, we investors could certainly use some help from the SEC and other financial regulators. A close eye and real repercussions would be helpful.

Hopefully the SEC will continue to take stronger stands in favor of investors' best interests, and more regulators will truly make sure that wrongdoing is acknowledged and punished. If we don't want to give companies incentive to do the wrong thing, that watchdog could use a lot more bite.

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Check back at for more of Alyce Lomax's columns on environmental, social, and governance issues.

Read/Post Comments (4) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 22, 2013, at 11:28 PM, WileyCyote wrote:

    Thomas Jefferson said it VERY well.

    Bankers are more of a threat than standing armies.

    They continue to prove that.

    Keep on Truckin' gang!

  • Report this Comment On June 24, 2013, at 12:19 PM, TMFLomax wrote:

    Absolutely WileyCyote.

    And yes, keep on truckin'!



  • Report this Comment On June 25, 2013, at 9:04 AM, cooncreekcrawler wrote:

    After reading George Packer's "The Unwinding", you just added another reinforcement that the SEC lacks -----let's just say is lacking in certain areas. Thanks for the article.

  • Report this Comment On June 30, 2013, at 10:37 AM, gskinner75006 wrote:

    Unfortunately the SEC is a government entity an therefore it is a complete failure, and if history is any guide, it always will be. Though Thomas Jefferson was a great man of intellect, let's not forget he was a slave owner and may have used some of them for his own "gratification". I draw this to your attention because I read too many articles these days that try and define (in different ways) the banks, corporations, (insert your favorite villain here) as modern day slave owners with us being the slaves (the "gratification" part because of what most comments say the aforementioned group are doing to them on a daily basis). My point is you ask? Live financially responsible, and the banks, etc... (large or small) will not be the Boogieman that is hiding under your bed. You will live a free man (or women).

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