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SEC Moves to Take 'Handcuffs Off' Regulators

POSTED: 02:26 PM ET, 02/ 6/2009 by Derek Kravitz

To combat growing criticism of how the federal government watches over the financial markets, the new head of the Securities and Exchange Commission said she is ending a two-year policy requiring agents to get approval from the government's five-person commission before negotiating fines and penalties with firms accused of violating federal regulations.

Mary Schapiro, in her first public address (see speech) as chairwoman at the Ronald Reagan International Trade Center in Washington, said the practice "just sends the wrong message," has caused repeated delays and has sometimes resulted in reduced fines and penalties for violating firms.

"The action I am taking to end the penalty pilot is designed to expedite the commission's enforcement efforts to ensure that justice is swiftly served to those public companies who commit serious acts of securities fraud," said Schapiro, who served as an SEC commissioner from 1988 to 1994.

The "penalty pilot" experiment, as it was dubbed by officials, required regulators to meet with the commission first before brokering civil monetary penalties for public companies as punishment for securities fraud.

Schapiro's decision was not a surprise to industry observers. As Compliance Week noted, Schapiro had said she wanted to "take the handcuffs off the enforcement decision," after Sen. Jack Reed (D-R.I.) made a comment during her confirmation blaming the "penalty pilot" rule for restricting government regulators.

The debate over how best to police securities fraud grew even hotter at the SEC after the Sarbanes-Oxley Act of 2002, which placed a host of new regulations on public companies in light of the accounting scandals of Enron, Tyco, Worldcom and others. But the effectiveness of the financial penalties imposed, especially when you consider many executives have indemnification rules built into their contracts, has never been truly settled, SEC officials have said.

"Of course, an increase in sanctions may lead to a reduction in bad behavior, as changes in outcomes should reflect changes in regulatory incentives," the SEC's chief economist, Chester S. Spatt, said during a speech in January 2007 in Chicago. "However, the repeated use of either high sanctions or optimal sanctions does not imply that there should be continuing improvements in the quality of the underlying outcomes."

By Derek Kravitz |  February 6, 2009; 2:26 PM ET Economy Watch
Previous: The Details: How Treasury Overpaid the Banks | Next: Pricey Congressional Retreats, Hospital Lapses and More on Rangel


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QUESTION: When any financial institution receives any Federal Bail Out money, and they are "nationalized", then WHY are the top executives allowed to receive any higher pay than (1) the pay scale for the President of the United States, (2)higher than the pay scale for any elected official in the United States Congress, (3)higher than any apointed government official paid as a Cabinet member, (4) and higher than any government worker who is the top administrator of any government agency who was hired by taking an examination for federal government employment proving their ability in math, reading & writing and other skills?
Cris Ericson, Vermont

Posted by: crisericson | February 6, 2009 2:59 PM

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