It seems the SEC is much more about kowtowing to large Wall Street firms than it is regulating them.Some of that is related to the fact that the current SEC Chairperson, Mary Shapiro, was the former chairperson of the self-regulatory body for large Wall Street firms known as FINRA.  Her severance pay to work at the SEC was $9 million.  She reminds me of a neighborhood boy named Mark De Simone who, in the late 1970’s, wanted to be an auditor for the SEC so he could mark his time and then work for a Wall Street firm and make millions.  I never found out whether Mark ever worked for the SEC or was transferred to Wall Street and made his millions.   But, that sentiment reflects the statement made by Bernie Madoff who bragged that he could easily handle SEC auditors because most of them were more interested in a job application than auditing his firm.

Fast forward to 2012 and it appears we continue to have this problem with the SEC.  It loves Wall Street so it treats them gently and makes up for that lackadaisical standard by over regulating and punishing small, non-Wall Street firms.

According to Brian Hamburger’s article in the July issue of Financial Advisor, a 2009 Harvard Law School study looked at the historical data on SEC enforcement actions to determine if there was a bias toward larger firms.  The answer was a resounding “yes.” The study noticed three things:

1. Typically, SEC actions against larger firms are much more likely to be limited to corporate liability and not extend to individuals. The latter is much more commonly pursued in actions against smaller firms.
2. In actions against larger firms, the SEC has a much greater tendency to pursue only administrative proceedings. The incidence of court proceedings is markedly higher in actions against smaller firms.
3. In administrative proceedings, employees of larger firms tend to receive more lenient sanctions than employees of smaller firms who commit similar violations.

Brian then goes on to state who he thinks the SEC is targeting for aggressive enforcement when he stated in the same article “If Not the Behemoths, Then Whom?”

Among SEC enforcement targets, Registered Investment Advisors (RIA) have become the new bull’s-eye. Focusing on quantity over quality, the agency has touted a 30% increase in fiscal 2011 enforcement actions against RIAs over the previous year (146 separate actions in total). The regulator points to this as a sign of its renewed vigor in protecting the interests of investors.

What were these egregious violations, you ask? In the vast majority of cases, the offenses fell within the realm of “failing to have adequate written compliance policies and procedures,” “failure to maintain adequate books and records,” and “failure to adopt a written code of ethics.” Infractions that, in a recent Rolling Stone political blog, author Matt Taibbi argued would warrant “the full Princess Bride torture machine treatment.”

Even after the 2008 financial meltdown and revelations of the SEC’s failure to discover the Madoff Ponzi scheme, it appears the agency continues to sidle up to Wall Street jobs (maybe hoping for jobs after the employees have left the agency) and then pounce upon the small firms for seeming innocuous transgressions.  This is no way to regulate an industry.  But it is a great way to secure a position on Wall Street!