Putting the SEC cops back on the Wall Street beat

While U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler’s first choice for director of enforcement resigned six days after her announcement, his decision to name that director first nevertheless recognizes the importance of prioritizing enforcement. He should not pick another Wall Street defense lawyer as his enforcement director. But, no matter whom he picks, he or she will have a very tough job, made tougher by the SEC’s decades-long, bipartisan record of prioritizing braggadocious press releases and revolving-door career advancement over real law enforcement.

In fact, the SEC has been AWOL for years in enforcing the law, particularly against the elite, wealthy and well-connected financial institutions on Wall Street and their staffs, supervisors and executives, along with their many enablers. That disgraceful practice has created a two-tier system of (in)justice in America: light-touch for elite Wall Street banks and bankers and get-tough for the rest of America. That’s why it is no surprise that Wall Street is populated with recidivists and that the ongoing crime spree is getting worse, as detailed in a recent comprehensive study.

Unfortunately, the SEC’s pattern has been sweetheart settlements with inflated top-line fine amounts that allow corporations to use shareholders’ money to buy tax-deductible get-out-of-jail free cards for their executives, who are virtually never punished. Such actions grab headlines but have become little more than a manageable cost of doing business. 

Worse, the SEC allows the lawbreakers to jointly draft the so-called “statements of fact” that are carefully crafted more to conceal than reveal, leaving the public in the dark about what really happened. That indefensible lack of transparency prevents oversight and accountability not only of the lawbreakers, but also of the SEC. That pattern of weak, ineffective and insufficient action has rewarded and incentivized lawbreaking, and it must stop. 

Chairman Gensler and his next enforcement director will need to break with past practices and implement new policies that meaningfully punish and deter lawbreaking corporations, banks and individuals. The first and most important change has to be a requirement that every enforcement investigation, proceeding and action must fully and carefully evaluate the conduct of all individuals connected in any way to the suspected wrongdoing, including operational, audit, risk, legal and compliance personnel as well as all responsible supervisors, executives and Board members.  

Every action must then require full disgorgement of all ill-gotten gains, material fines based on profits, admissions of wrongdoing, full and complete statements of fact, independent monitors and non-waiver of collateral consequences. Unless there is a good reason publicly stated, every action must also include personally fining, barring and enjoining all involved or responsible individuals. After all, banks and corporations don’t commit crimes; bankers and executives do.

Importantly, this is not gratuitous “Old Testament justice,” nor is it anti-business or anti-bank. The SEC’s enforcement of the law and its fight to end lawbreaking are critical to protecting investors, market participants and the markets themselves. Without effective enforcement, the SEC cannot ensure fair dealing and a level playing field or facilitate price discovery, capital formation and capital allocation. But with effective enforcement, we’ll see more fair and robust markets and that means more Main Street jobs, economic growth and prosperity, ideally broadly shared. 

The U.S. has the deepest, broadest capital markets in the world because investors have faith and trust that they are fair, transparent and relatively fraud-free. That is what is at stake when SEC enforcement fails and lawbreakers and predators are allowed to roam free. 

There’s no question that bringing such actions against corporations and their personnel, especially officers, executives and Board members, will be complex, arduous, expensive and often difficult to win. Indeed, these cases have a significant risk of loss and the inevitable bad press. 

Nevertheless, the SEC must resist the impulse to take the path of least resistance and settle for a big but meaningless headline grabbing fine, a self-congratulatory press release and artificially juicing their career-enhancing statistics, however misleading they might be. These are the only types of actions that will punish and deter lawbreakers and slow if not stop the Wall Street crime spree. As important, this will end the two-tiered system of justice and restore the principle of equal justice under law. Only then will the SEC fulfill its mission and be taken seriously on Wall Street and in corporate America. 

This is long overdue, and the American people deserve no less.

Dennis Kelleher is president and CEO of Better Markets, a non-profit, non-partisan organization founded to promote the public interest in the financial market and support the financial reform of Wall Street.