In one of her first actions as SEC chairman, Mary Schapiro announced today that she was getting rid of a policy that required SEC officials to get approval from the commissioners before negotiating corporate penalties. According to the Associated Press, “Schapiro said that practice ‘just sends the wrong message.'”
But Schapiro should perhaps focus a little less on message and a little more on an action’s consequences for investors the SEC is supposed to protect. Because unfortunately, this change will have the effect of further harm to shareholder victims of corporate fraud.
Corporate penalties take money not from individual executives guilty of fraud, but from the corporate treasury that ultimately belong to the ordinary investors in the company. Frequently, these penalties have the effect of harming shareholder victims of corporate fraud twice: once when the corporate executives misuse a company’s money, and a second time when when the corporate penalty further reduces the company’s assets that belong to all shareholders. That’s why it is more just and more effective for the SEC to levy penalties against individual wrongdoers rather than the corporation as a whole.
The 2006 policy Schapiro wants to reverse was prompted by concerns expressed for former Commissioner Paul Atkins and others that the interests of innocent shareholders weren’t being given enough weight in negotiation of corporate penalties. The rule was a sensible change that didn’t outlaw corporate penalties, but ensured that their use was carefully considered by SEC commissioners before enforcement staff could levy an arbitrary fine that could harm shareholder interests.
Moreover, the policy only applied to penalties on corporations, not individuals accused of wrongdoing or private broker-dealers such as the firm of Bernard Madoff.
Schapiro, whom I have praised previously for her regulatory prudence, is correct in wanting the agency go after corporate wrongdoers with full force. But she should seriously rethink instituting this policy change that would have the unintended but predictable effect of punishing innocent shareholders twice.