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Monday, February 06, 2012

Is the SEC too soft? The New York Times has some data ....

A recurring theme in both scholarship and the popular press is that the SEC has been too soft on wayward corporations.  It settles cases without extracting admissions of wrongdoing, and, according to the Times' most recent front-page piece of criticism last Friday, it too often has "waived" certain penalties designed to protect investors against fraud.

I have to say I was somewhat startled by the Times' headline on Friday, which stated that the SEC had issued 350 waivers to so-called recidivist institutions during the prior decade.  What waivers?  Which institutions? What was this all about? 

 So I read further and then realized that the article was in fact criticizing the SEC's decision not to rescind certain privileges it ordinarily granted to such institutions, despite violations of the securities laws.  The Well Known Seasoned Issuer status was one, as well as the safe harbor for forward looking statements.  The Division of Corporation Finance has a helpful Statement on the factors it considers in continuing Well Known Seasoned Issuer status despite an antifraud violation. You can see the full list of waivers the Times found over here

 The thrust of the article's headline and first few paragraphs was that the SEC  handed out goodies - ie, waivers -- gratuitously to companies that blatantly did not deserve them.  The truth, which was hinted at in later paragraphs, seems much murkier.  The SEC decided, in its discretion, to waive provisions that would strip certain institutions of their privileged status. Given the costs and benefits that likely accompany such a decision, its difficult to say that the SEC chose the wrong one, simply because of the absolute number involved (350 waivers in ten years - so what?).   Had the Corporate Division declined to issue these waivers, and had declinations become common and well-known, the institutions in question might have been less willing to enter into settlements for previous violations.  That would have left the SEC with fewer settlements and the benefits that accompany them.  Does this argument sound familiar

Ultimately, the Times article appears to be a critique of how strongly (or softly) the SEC penalizes offenders.  Setting penalties is a dirty business.  If your aim is social welfare and you want to achieve optimal deterrence, then you don't want to impose drastic penalties on corporate firms at the drop of a hat.  Regulatory theory tells us further that you want to avoid imposing a drastic fine immediately because you want to encourage cooperation and self-regulation from so-called reformable entities.   

With all this in mind, it was not surprising to learn (on the second page of the Times article, if you were willing to read that far), that the SEC reserved non-waivers for relatively rare situations.   Perhaps this was bad policy, but simply reciting the number of waivers over a ten year period doesn't advance the ball that much.

Of course, had the Times written the article in a more even-handed way, the conclusion would have been less clear - and probably less eye-catching.  So instead, the Times packaged the information into a pat story that likely annoyed many of the folks at the SEC itself.  It is difficult to believe that media pressure of this type does not affect SEC staff and supervisory personnel, at least on a subconscious level.  And this strikes me as highly problematic.  It is one thing for an agency to respond to well-informed criticism; it is quite another matter when the agency comes under attack simply because it doesn't appear sufficiently harsh.  

Posted by Miriam Baer on February 6, 2012 at 08:07 PM | Permalink


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Given the well known problems of regulatory capture - including especially insidious cognitive capture - perhaps a sensationalist press is merely bringing the competing pressures on regulators closer (not to say close) to equilibrium.

Posted by: Brad | Feb 6, 2012 8:49:46 PM

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