The SEC and the DMV

“The SEC Should Copy the DMV” is the title of an article published in the New York Times by Joseph S. Fichera recently. The article focuses on the use of corporate fines, questioning whether they are effective: “The SEC and other federal regulators have levied over $125 billion in penalties on Wall Street since the global financial crisis of 2008. Yet few believe that these fines are enough to change behavior. For the largest financial institutions, a multibillion-dollar penalty can amount to a speeding ticket – another cost of doing business,” Mr. Fischera notes. He goes on to argue that the point system of the DMV might be adopted. Under that system drivers collect points for each infraction. When the driver accumulates enough points their driving privileges are revoked for a period of time. If the SEC adopted a similar system, then the market place might force firms into effective compliance as points pile up.

Would this approach bring greater accountability, change behavior and be more effective? Consider the fact that settling an SEC enforcement action has significant collateral consequences for most regulated entities which can, to an extent, have the effect of the DMV point system for the driver. The difference is this: For the driver the suspension will be imposed. The driver will not be permitted to operate a motor vehicle. For large Wall Street financial institutions, however, the SEC will and does routinely, grant a waiver in view of the potential adverse consequences – the financial titans cannot be taken off the road.

Yet to a certain extend the SEC is already mimicking the DMV. A key aspect of DMV enforcement in recent years is cameras. Those cameras photograph drivers crashing red lights and speeding. When the driver is caught there is a choice – pay and get no points or contest the claimed violation. Most people pay the fine. By all accounts the program is effective at creating revenue for the state and regulating traffic.

The SEC’s version of the DMV camera is its largely computer driver broken windows enforcement program. Much like the DMV cameras, the SEC computers issue “tickets” to those who fail to file various schedules such as a Form 4, don’t comply with certain disclosure obligations and violate Rule 105. The offenses are based on strict liability so the cases result in an immediate settlement and a fine. Like the DMV the SEC piles up a large number of violations. Like the DMV the SEC also piles up a lot of fines. The Commission also garners headlines by releasing press releases touting large numbers of violations and big fines. While the SEC program may be effective at improving compliance for routine filings by largely smaller issues, it is doubtful that it has any impact on key enforcement priorities such as FCPA violations and financial fraud. Indeed, it might be argued that the program is counter-productive in those areas, creating a market place impression that SEC Enforcement is keyed to broken window type violations.

Nevertheless, Mr. Fichera does have a point. The SEC needs to retool its enforcement focus. That starts with what the agency likes to call the “tone at the top,” that is, the five SEC Commissioners. Like Congress, each Commissioner seems to have his or her own agenda. Like those con Capitol Hill, the various points of view seem to reflect different political philosophies. Yet the SEC is supposed to be apolitical, not reflect the Congress. Ignoring that point and acting like Congress can only garner for the SEC the same ratings the public gives Congress. Those ratings appear to be heading for 0%.

If the SEC is going to be effective, the tone at the top needs to reflect the core mission of the agency. That mission is to bring a new ethics to the market place. It is that tone the five Commissioners need to make sure drives the agency forward. That spirit needs to be the focus of what the agency, and in particular the enforcement program, is about. Doing this is tough work. Crafting remedies that have the long term effect of changing conduct to help bring a new ethics to the markets may not generate the headlines of a broken windows approach or large penalties. It will, however, will benefit shareholders, investors, the markets and others. It will garner the Commission the trust and respect of those it regulates as well as the public, thereby making it a more effective regulator. Now is the time to begin establishing an effective tone at the top.

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