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The Hill (Washington, DC)

Lawmakers to Press SEC to Change Rules on Settlements for Wrongdoing

Peter Schroeder

The fact that both parties are on board with the hearing, which Rep. Barney Frank calls a “throwback,” is a telling indication of how aware lawmakers are of the public anger at Wall Street, and the desire to see someone take the blame.(photo: REUTERS/Adam Hunger)

How much is an apology worth on Wall Street?

That will be a key question at an upcoming hearing at the House Financial Services Committee, where lawmakers in both parties want to probe the Securities and Exchange Commission’s (SEC) existing policy of settling with financial institutions they believe to have violated financial rules.

The SEC’s policy allows it to settle with firms without actually requiring the firms to admit to any wrongdoing, something that has rankled members of both parties.

In a rare bipartisan move, the top Republican and Democrat of the House panel announced earlier this month they wanted to explore the issue, in the face of a growing public perception, driven in large part by the Occupy Wall Street movement, that Wall Street forces have not been called to reckon for their contribution to the economic downturn and financial crisis.

Rep. Spencer Bachus (R-Ala.), the committee chairman, said the practice “raised concerns about accountability and transparency," while ranking member Rep. Barney Frank (D-Mass.) said "the policy of signing agreements without forcing firms to admit or deny wrongdoing raises serious issues."

Frank told The Hill that he had not decided if a change in policy was needed, but that the matter merited further discussion and exploration.

“It’s a serious subject on which more serious thought should be done,” he told The Hill.

The fact that both parties are on board with the hearing, which Frank calls a “throwback,” is a telling indication of how aware lawmakers are of the public anger at Wall Street, and the desire to see someone take the blame.

“Case by case you would like to hammer people,” said Frank. “There’s one broad question – is it a sufficient deterrent? Because that’s what you’re trying to do with these things, deter bad behavior.”

“These are the kinds of hearings committees ought to be doing,” he said. “It’s going to be a totally bipartisan hearing at the full committee level, and it’s not a hearing held by one party or the other to embarrass somebody or make a point. It’s actually a hearing to give serious consideration to an important subject.”


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The exact date and witness lineup of the hearing are yet to be announced, but the Wall Street watchdog’s settlement practices entered the spotlight after a federal court judge threw out a massive $285 million settlement the SEC sought with Citigroup over charges it misled investors in selling a financial product loaded with risky mortgages.

In his decision, U.S. District Judge Jed Rakoff harshly criticized the SEC for refusing to demand any admittance of guilty, saying as a public agency it had a duty to seek out the truth.

“In any case like this that touches on the transparency of financial markets whose gyrations have so depressed our economy and debilitated our lives, there is an overriding public interest in knowing the truth,” he wrote in a scathing opinion. “In much of the world, propaganda reigns, and truth is confined to secretive, fearful whispers… But the SEC, of all agencies, has a duty, inherent in its statutory mission, to see that the truth emerges.”

The SEC has since appealed his ruling, even going so far as to ask the Court of Appeals to overturn Rakoff’s ruling by issuing a writ of mandamus, a rare move typically reserved for extreme cases of judicial overreach. Meanwhile, Rakoff has fired back, accusing the SEC of misleading him and the appeals court.

The SEC brings between 650 and 700 cases a year. Roughly 15 to 20 of those cases go to court and result in a verdict, while the rest either are settled or remain ongoing.

However, the SEC’s settlement policy is not rare when it comes to government agencies. State securities regulators also pursue the same sort of settlements, and other government regulators actually allow defendants to settle while denying the charges they face.

For example, when Bank of America reached a $335 million settlement with the Justice Department over charges its Countrywide mortgage lending unit discriminated against minorities, it denied all allegations.

The SEC declined to discuss its settlement policies while its case against Citigroup is being appealed, but top enforcement officials at the agency have vigorously defended its existing practice. When the SEC decided to appeal the Citigroup ruling, Director of Enforcement Robert Khuzami said it set a “new and unprecedented standard” for the judge to require an admission of fact before agreeing to a settlement. He pointed out that courts still accept settlements, even in cases where the defendant actively denies the allegations presented.

Khuzami argued that forcing the SEC to play hardball with misbehaving financial entities will put a strain on its already stretched resources. By having to go to trial more often because settling is off the table, the SEC will be able to pursue fewer enforcement actions overall and less comprehensive protection of the nation’s investors, he warned.

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